Stop loss plays an important role in risk management. Your stop loss is designed to allow you to set the predefined maximum amount of loss that won’t hurt you, but only pinch your trading capital. It is the protection that allows you to determine a maximum of contingent loss, i.e. if the position turns into a loss, the system will automatically close the trade when the predefined price level is reached.

So when the market price reaches or exceeds the stop loss level, the position is automatically closed and the loss is realized. How much loss one can smoothly accept psychologically depends on one’s mentality, and probably also on the amount of capital behind it. If you have a million dollars, you probably won’t even take a hundred dollar loss, but if you have a thousand dollars, a hundred dollar loss can be painful.

Setting the stop loss and determining its optimal level is an important part of developing a trading strategy. Choosing the right S/L level depends on a number of factors, such as trading objectives, market volatility and trading time horizon. The placement of the stop loss level depends on each individual’s trading strategy, risk appetite, and market conditions. Generally speaking, the stop loss level should be placed at, or just behind, a price level at which the trading idea becomes invalid, and the position is automatically closed.

The more protective lines between the price and the stop, the more safe the S/L is. Use the levels in which you believe in. Work with a small margin, don’t place the stop exactly at the level you want, but leave at least one or two spread distance.

1. Technical Analysis. Technical analysis can help in selecting the appropriate stop level based on breakout points, support and resistance levels, Fibonacci levels, trendlines, indicators, etc.
2. Volatility. The stop-loss level can be adjusted according to market volatility. In the case of higher volatility, a wider stop-loss level may be applied, while in lower volatility, a tighter stop-loss level is recommended.
3. Trading Strategy. The trading strategy and the trader’s objectives can influence the stop-loss level. For example, if someone wants to hold long-term positions, they might place the stop-loss level further away to allow more room for the position.
4. Risk Tolerance. The stop-loss level should be placed according to the trader’s risk tolerance and capacity. It’s important to consider the maximum risk the trader is willing to take and the acceptable loss in a given trading situation.

It’s important to note that selecting the stop-loss level is a subjective decision, and each trader has their own strategy and preferences. The stop level should always be chosen carefully, considering the trading plan, risk level, and market conditions.

Many traders make the mistake of moving their stop-loss further when the price starts approaching it. They mistakenly hope that the price might reverse and move back in the “right” direction. However, this significantly increases the initial risk they took on and breaks their own rules. If someone violates their own rules, the subconscious mind perceives it as a lack of self-respect, leading to not only financial losses but also psychological damage.

It’s important to remember that the stock market, forex, or any other financial market operates in a completely different dimension than the everyday world. The rules are different from those in life or Hollywood movies. In the world of trading, hope is not your friend; it is your greatest enemy! If you move your stop-loss out of hope that the price will reverse, it most likely won’t, and it will continue to move against you, destroying your risk management. Even if you’re lucky and the price does reverse, it’s even worse because you’re embedding false information in your mind that hope works, and you can break your rules because you might avoid losses due to your lack of discipline. This kind of behavior will inevitably lead to the depletion of your trading capital in the long run. There is no place for hope in the market!

Always strive to reduce the risk! For example, if you take a long position in the market and the stop loss is below the previous valley, the price rises, then makes a correction and forms another valley, it is advisable to pull the stop to the bottom of that valley, plus the allowance already mentioned. We decide what constitutes a good S/L level, but always stick to the rules.

As a beginner, your initial risk per trade should not exceed 1%. This means, for example, with a $10,000 account, you should risk only $100 per position. It’s important to get accustomed to losses, accept them, and view them as the cost of running your forex business.

It’s crucial to remember and apply this rule: only open a position if you have already precisely defined your stop-loss level. Either include it with the order or set it immediately after placing the order. Do not procrastinate! Anything can happen in the market, and it usually does.

Even using a stop loss doesn’t fully guarantee avoiding unplanned losses (though it does 99% of the time). Under certain market conditions, such as significant price gaps or lack of liquidity, the position might close beyond the stop level. Rarely, the price movement may simply skip over the stop. Setting a stop loss too tight can also lead to being stopped out prematurely, meaning the position may close early due to normal price fluctuations.