Where to Place Your Stop Loss when Trading Forex

In forex, it’s not just about deciding where the market will move. Take profits and targets are always fairly easy to set, and few traders really struggle deciding where they will exit trades. However, if you’re like plenty of traders, it’s easy to get stopped out of a trade even if your directional bias was correct. You knew EURUSD would move up to the daily highs, but your buy position was stopped out by 10 pips anyway. We’ve all been there, right?

In this article, we will look at your 6 options for placing stop losses within the forex markets, so you can test these in your strategy and see what difference you can make to your win rate!

Where Should You Place Your Stop Loss In The Forex Markets?

Placing a stop loss is no easy feat. On one side, you need to make it large enough to allow intraday market fluctuations and give the market space to breathe. On the other hand, you want to keep your stop loss as tight as possible to obtain the best risk to reward ratio within the markets – making you as profitable as you can be. We’ve taken hundreds of trades over our careers where the stop loss, in hindsight, was placed in the wrong area and either cost us some unneeded stress or unneeded losses!  

With that being said, you need to make your stop loss placement as mechanical as possible. By mechanical, meaning you should have some kind of formula that can be repeated in each trade, regardless of the currency pair, that allows you to almost automate the process – removing human error. Many of our Elite Traders Club funded traders use a mechanical ruleset (or as close as possible) when deciding placements for stop losses.

 Let’s take a look at your best options for a simple stop loss placement within your trading plan!

Option 1 – Highs & Lows

One of the easiest ways to place a stop loss is on the swing lows or highs created within the market.

This can be replicated on pretty much any time frame, although we would advise that you use swings on at least the 1H time frame, as they’re typically more significant than swings on low time frames. This is typically where most traders put their stop losses, so it may not be the best strategy. Often price will retrace back to these key swing levels to gather liquidity and orders before moving in the direction the trader assumed it would… This often leads to traders being stopped out prematurely.  

However, it is worth mentioning that many of our funded swing traders use this approach for their stop losses on the higher time frames!

Option 2 – Candlesticks

Many traders like to place their stop losses at the top/bottom of the entry candle they’re using. As shown in the picture on GBPUSD, after 2 bullish 1 hour candles, the trader entered the market with a stop loss below the wick of the entry candle.

This is a technique typically used by scalpers due to its tight nature. Using the candlestick for stop loss placements can provide some gigantic risk to reward opportunities, but does frequently result in many additional losses too – as such is the way with tight stop losses.

Option 3 – Indicators

Many traders like to use indicators to map where they should be placing their stop losses. The beauty of doing this is it’s completely out of the hands of the trader, meaning there cannot be a possibility for human error – great! 

In the example above, the stop loss has been placed on the 50 EMA on the 1H time frame in the long trade. There are hundreds of indicators out there that can be used to decide a stop loss placement – so you need to backtest which indicators get the best results. I have tested using the EMA for the stop loss placement many times, but I wouldn’t say it’s my go to strategy! 

Option 4 – Fibonacci

Using the Fibonacci on your charts is a great way to dictate areas for stop loss placement – again because this has very little human error potential.

Use the Fibonacci to map out your trading setup. Whether bearish or bullish, this should provide an apparent set of stop loss points for you to use. Which point in the Fibonacci tool you use will greatly depend on your strategy. As with all of the other stop loss tools here, I’d recommend back testing your trading strategy for a good few years worth of data before coming to any decisions.

Option 5 – In Accordance With Your Take Profit Size

Some traders like to place their stop losses depending on their take profit requirements. For example, you want to have a 1:2 risk to reward ratio. You are assuming that the market will continue trending bullish, as in the chart above, and take out the previous high. From the entry point to the high would be 90 pips. Thus giving you a 45 pip stop loss if you’re looking for a 1:2 RR.

This strategy works great for traders! However, it also depends on how good you are at placing targets within the markets. If you typically aren’t great at pinpointing targets, this stop loss strategy won’t work.

Option 6 – Trailing Stops

Another great way to position stop losses is by using trailing stops. It’s fairly easy to automate this process using EA’s and other forex bots in the market. Essentially, your stop loss will move alongside the market as the trade pushes into further profits. For example, if your stop loss is set at 10 pips. Every time the market moves, your stop loss will move up a pip or two as well, keeping it roughly 10 pips behind the current price. However, it’ll never move against you! This can be a great way to use your stop loss to reduce risk and get more out of the markets!

In Conclusion – Where Should You Place Your Forex Stop Loss?

In summary, there are some great options for placing your stop loss that can hopefully reduce your risk and keep you in winning trades whilst taking you quickly out of the losing positions! When building your stop loss strategy, ensure you’re making it as rule based as possible. When you’re entering the markets, you don’t have long to ensure your lot size is correct, the percentage risk is correct and everything looks how it should. Without a rule-based strategy that is simple to follow, your chance of human error is huge!

Are you looking for a funded trading account? Work with Lux Trading Firm now.