Stop Loss is often overlooked by some traders, but for professionals, Stop Loss is a very powerful weapon. Many traders experience significant losses due to not using Stop Loss, which ultimately wipes out all the profits they have accumulated over time. Although not popular, Stop Loss is an essential part of a successful trading plan and Money Management strategy.
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- 1. Using Money Management:
In Money Management strategy, there's a general rule that the maximum risk per trade should not exceed 2% to 3% of the total capital. Based on this rule, traders calculate the size of Stop Loss after determining the lot size according to the maximum risk they accept. For example, if the account balance is $1,000 and the accepted risk is 2%, then Stop Loss will be set in such a way that the risk per trade does not exceed 2% of the total capital.
- 2. Based on Chart Patterns:
This method is based on price movement patterns, including Support and Resistance levels, and sometimes using indicators for confirmation. Stop Loss can be determined based on Support and Resistance levels or trend lines formed. Usually, this approach is combined with Money Management method to limit risk.
- 3. Using Margin Stop:
This method is not recommended for novice traders. By using Margin Stop, traders determine Stop Loss based on Margin Call from their total balance. This means that if the Stop Loss is hit, the account balance will only be as much as the initial margin used when opening the position. This method is speculative and highly risky.
- 4. Based on Market Price Volatility:
Market price volatility can also be a reference for determining the size of Stop Loss. In volatile market conditions, Stop Loss is placed wider to anticipate significant price movements. Conversely, in quiet market conditions, Stop Loss can be placed closer. Bollinger Bands are one of the indicators used to measure market volatility.
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