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Risk Management Tips for Day Traders: Determining Stop Loss and Position Size

In the world of day trading, risk management is a crucial key to preserving account longevity. One critical aspect of this is establishing exit plans involving stop loss and take profit levels. This article will provide tips on how to determine stop loss levels and calculate position sizes based on a percentage of the equity account.

  1. 1. Determining Stop Loss Levels

The first step in risk management is to determine the stop loss level before executing the entry. One simple method that day traders can use is to utilize resistance or support levels as references. Identifying resistance or support levels can be done through price action, Fibonacci, or pivot points.

Example application using Camarilla pivot points on a 30-minute time frame:

  • dentify the potential range for a sell entry between resistance R2 and R3 (A) after the price fails to penetrate R3.
  • Determine a logical stop level a few pips above R4 (B), assuming that if the sell position is not valid, a new high level is likely to form that may breach resistance R4.

Traders can open several sell positions with the same stop loss level, so if all positions are invalid, they will close after the price breaches R4.

  1. 2. Determining Position Size Based on Risk

The next step is to determine the risk size based on a percentage of the equity account, often applied with a 1% rule per trade. For example, if the equity account is USD 10,000, then the maximum risk per trade is USD 10,000 x 1% = USD 100.

By setting a stop loss of 25 pips, the risk for that trade is USD 100 / 25 = USD 4. If the trader uses a mini lot (per pip = USD 1), then the lot size is USD 4 / USD 1 = 4 lots. If using a standard lot (per pip = USD 10), the lot size is USD 4 / USD 10 = 0.4 lots.

Each trade can have a different lot size, depending on the number of pips from the stop loss level. It is recommended that the risk per trade does not exceed 5% of the equity account.

Good risk management is the key to success for day traders. By determining stop loss levels wisely and measuring position sizes based on a percentage of risk from the equity account, traders can increase their chances of success and preserve their account longevity in the long run.


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