Here is a topic that NEEDS to be hammered home. It took me personally a long time to figure it out and I think it takes most people on this journey a long time.
It’s a topic we don’t like to talk about, it’s taboo in the trading world.
Have you ever been here? “just give me a trading system, method that works and I will make money, how hard can trading be?”.
I think you would be hard pressed to find anyone trading who hasn’t had that thought process.
How you manage your stop loss and how much you risk on your trade is so important. In fact outside of having a solid method to trade it is the MOST important part of trading.
Once you have a solid method to trade the market and understand money management, how stop placement really works, profit targets etc etc only then can you start to work on your mental game. The mental game of trading is JUST AS IMPORTANT as the prior two steps but this is usually the order in which they are accomplished while learning this skill.
There are three important parts to trading.
A. Finding a good method that will trigger you into the market
B. Money management, risk/ reward, stop placement, profit targets
C. Mental aspect the psychological game
These are in no way above outlined in order of importance. They are ALL important. They are what makes up a complete trader.
I am going to do my best to explain how stop placement should work along with money management. If this can clarify this topic for one trader then it’s well worth it.
Okay …. so we all agree (as much as we don’t want to at times) that trading is a profession and like any other legit profession it takes hard work, determination and stickativity. It is challenge like no other.
Quote I came across in my travels “trading is the simplest hardest thing you will ever do”. Raise your hand if you agree.
How do I manage my risk? How does stop placement really work? What value should my pips be?
First things first. YOU do not determine your stop loss or your pip value. Your stop loss size is determined by the market and your pip value is determined by your account size.
Let me explain …
So many people are concerned by stop size and or stop value and or pip value.
It really is simple. Your risk should always be the same ie 1% of your account value. Some will be comfortable with higher % say 2 and some will only want to risk 1%. Only you can determine that but once you pick your number it stays the same. Obviously as your account grows or gets smaller that 1% will be worth more or less depending on your trading ability BUT it will always be 1%.
For me it’s 1%
For this example we will use a 1000$ account.
So regardless of trade or stop size I can only risk 1% per trade, that means all I can ever have at risk per trade is 10$.
If my stop is 20 pips away I can only risk 50 cent pips …. 10$
If my stop is 40 pips away then my pip value is 25 cents.
If my stop is 100 pips away then my pips would be worth 10 cents.
Remember a stop out is a stop out, does not matter if it is a 10 pip stop out or a 100 pip stop out in terms of dollar value it will equal the same.
Now for stop placement your stop should be outside the last swing high or low. You do not pick a random number like 20 or 40 or 50. You place your stop in a logical place that would have the least likely chance for getting stopped out.
So for all of your that are afraid of stops that are 40 – 60 pips away there is now no need to be scared because now your stops will be placed in regards to the market flow and the dollar value being put at risk will always be in your comfort level. It will always be the same amount in terms of dollars at risk based on %.
I hear people say “I have a 3000$ account and I want to trade 10$ pips”.
I say “I have a 5$ lotto ticket and I want to win the lotto”.
See what I am saying … expectations …
TRADING IS NOT GET RICH QUICK
TRADING IS NOT A DESTINATION
TRADING IS A JOURNEY!