【FX Lecture】A wide stop loss is not bad
Not necessarily
Hello, I’m Leo.
When you’re trading,
“Is it better to have a narrower stop loss?”
I often hear these questions.
If the stop loss is narrow, it feels like you can limit a single loss.
So,
“Let’s keep stop loss within 10 pips”
“20 pips or more is too wide”
In such cases, I think there are people who decide pips first.
However, I,
and then fit it to the chart
In my view,
the stop loss location is decided by the chart
as a principle.
What is the purpose of placing a stop loss in the first place
When people think of a stop loss,
the image is strongly of
“to minimize losses.”
Of course,
that is not wrong either.
If your scenario is negated, you exit
For example, suppose you’re aiming to buy on a pullback based on the latest low.
In that case, if you clearly break below the latest low,
the premise of “buying on a pullback” itself may collapse
potentially.
Then place the stop loss around that area.
That feels natural to me.
Why fixing every stop loss at 10 pips is dangerous
Suppose you fixed the stop loss at 10 pips every time.
But price moves differently in different markets.
↓
Even 10 pips can be enough to stop you out
In a market with large moves
↓
10 pips may be just normal noise and still stop you out
In other words,
such is the case.
What happens when you make stops too narrow
Because you want to minimize losses, you place the stop as close as possible.
At first glance, it seems quite rational.
But if there’s no justification for the stop level,
↓
slight retracement
↓
stop loss
↓
then price moves up in the direction you were aiming for
This happens more often.
If you frequently experienced “it jumped up right after being stopped out,”
it isn’t necessarily that the entry was bad
but that the stop was too close
also a possibility.
A 30-pip stop isn’t necessarily a bad trade
For example, suppose there is 30 pips to the recent low.
Then,
you might feel “30 pips is too wide.”
But,
there is within 30 pips
・the minor low
・the scenario negation point
so, as a stop loss location, that is natural.
The problem isn’t the width of the stop loss being 30 pips.
how should you set the lot size
is the real question.
If the stop loss is wide, reduce the lot
This is a crucial part of money management.
For example, suppose you decide a single trade may risk up to
10,000 yen
per trade.
If the stop loss is 10 pips, that 10 pips corresponds to a lot size that makes 10,000 yen at risk.
If the stop loss is 30 pips, adjust the lot so that a 30-pip move would still be 10,000 yen.
→ can increase the lot size
Stop loss 30 pips
→ reduce the lot size
Doing so creates
and that is the goal.
“Same lot every time” vs. “Same risk every time” are not the same
Confusing these leads to unstable money management.
For example, suppose you trade with 1 lot each time.
Stop loss 10 pips
Stop loss 50 pips
The same 1 lot yields very different loss amounts depending on the trade.
In other words,
lot size fixed ≠ risk fixed
as a result.
The order I follow
In my case, I think in this order before a trade.
↓
② Decide where the scenario collapses
↓
③ Check the pips to stop loss
↓
④ Determine the lot size from allowable loss
↓
⑤ Look at the RR to the take-profit candidate
I don’t set the lot first to force the stop loss closer.
That is the sequence.
If the stop loss is wide, it’s fine as long as the RR is good
Another important aspect is risk-reward.
For example,
Take-profit candidate: 90 pips
then,
RR 1:3
is achieved.
If you only look at stop loss width, 30 pips may feel wide.
However, if you can aim for 90 pips, the RR is substantial enough.
Conversely,
Take-profit candidate: 5 pips
then, even with a narrow stop loss, the RR is quite poor.
necessarily
A common mistake is “I don’t want to reduce the lot”
When the stop loss is far, reducing the lot makes the profit feel smaller too.
Then,
↓
leave the lot as is
↓
one loss becomes large
This happens.
But this causes risk per trade to vary wildly.
I focus on aligning the loss amount first, not the profit amount.
A wide stop loss does not mean a bad trade.
A narrow stop loss does not mean a good trade.
That’s not how I think.
What matters is
so you can exit
If the stop is far, you can reduce the lot.
If the stop is near, you adjust the lot.
And finally, look at the RR to the take-profit candidate.
Decide the lot from the stop loss.
Do not break this order.
Manage the risk per trade, not the stop loss width.
“Leo FX college”
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