4 Big Mistakes Traders Make When Setting Stops

Let's look at the four most common blunders traders make when it comes to applying stop losses.

We frequently highlight the need of risk management, but if done incorrectly, it can result in more losses than victories. And you don't want to be like that, do you？

1. Placing stops too dang tight.

The first typical blunder is setting stops that are tighter than Big Pippin's leather trousers from back in the day.

There's no place to breathe because they're so close together!

There won't be enough “breathing room” for the price to fluctuate before moving your way if you use ultra-tight stops on trades.

Always keep in mind the volatility of the pair and the fact that it may linger around your entry point for a while before continuing in a certain direction.

Let's assume you bought GBP/JPY at 145.00 with a stop loss at 144.90.

Even if you are correct in your prediction that the price would rebound from that position, there is a chance that the price may drop 10-15 pips below your entry price before rising, most likely to 147.00.

What's more, guess what？

Because you were stopped out in a flash, you weren't able to make a 200-pip profit. So don't forget: Give your transaction ample breathing room and factor volatility into your calculations!

2. Using position size like “X number of pips” as a basis for stops.

Using position sizes such as “X number of pips” or “$X amount” to calculate stops instead of technical analysis is a bad idea.

Remember how Newbie Ned taught us that？

Position size has nothing to do with how the market is performing when determining how far your stop should be.

Since we're trading the market, setting stops based on how the market moves makes a lot more sense.

After all, you choose your entry point and goals based on technical analysis, so your stop should be the same.

We're not suggesting that you fully disregard position size.

What we suggest is that you select where to set your pauses first, before determining the size of your position.

3. Placing stops too far or too wide.

Some traders make the mistake of putting their stops too far away, trusting their fingers that market movement will eventually move in their favour.

So, what's the point of establishing pauses in the first place？

What's the sense of hanging on to a lost transaction when you might use that money to invest in a more successful one？

Setting your stops too far out increases the number of pips your trade needs to move in your favour to be profitable.

Stops should be placed closer to the entrance than profit goals as a general rule.

Of course, you'd prefer to take a risk with a higher payout, right？

If you have a favourable reward-to-risk ratio, say 2:1, you'll be more likely to make money if you're right on the money at least 50% of the time with your trades.

4. Placing stops exactly on support or resistance levels.

Stops that are too tight？ Bad.

Are you going too far with your stops？ Bad.

So, where should a decent stop be placed？

We can inform you that it isn't exactly on support or resistance levels.

Why is that？

Didn't we just mention that when it comes to selecting stops, technical analysis is the way to go？

When selecting where to place pauses, it's certainly beneficial to take note of surrounding support and resistance levels.

If you're going long, simply locate a neighbouring support level below your entry and place your stop there.

If you're going short, look for the next resistance level above your entry point and place your stop there.

But why isn't it a good idea to position it directly on the resistance or support level？

The rationale for this is that after the price reaches that level, it may still turn and move in your way.

If you put your stop a few pips beyond that region, you'll be almost certain that the support or resistance has already been broken, and you'll be able to admit that your trade idea was incorrect.