One of the most common mistakes among beginner Forex traders is setting a Stop Loss (Stop Loss) that is too small. According to experience, placing a Stop Loss at 10-30 pips from the entry point is usually unprofitable.
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The Psychology of Small and Large Stop Losses
The psychological aspect is clear – traders try to minimize potential losses. However, this actually increases the chance of loss because a small Stop Loss requires precise entry at market peaks or troughs, and even then, it does not guarantee success. Setting small Stop Losses is essentially a form of overprotection that leads to inevitable losses.
It’s worth noting that there is another side to this: after losing due to small Stop Losses or missing an entry point, traders may start using larger Stop Losses with a buffer, thinking, ‘this time it won’t catch me.’ This practice is also unprofitable. Although larger Stop Losses trigger less frequently than smaller ones, the losses are comparable to the total losses from smaller Stop Losses.
Price Noise
Movement of less than 30 pips in a currency pair on the Forex market is typically considered price noise. In some pairs, such as GBP/JPY and EUR/JPY, noise can be up to 50 pips.
Naturally, it’s impossible to predict the dynamics of this ‘noise’ since it’s a random process. Therefore, when setting a Stop Loss, it’s essential to consider the ‘character’ of the currency pair, otherwise, even with proper analysis and entry, the market may ‘eat’ the Stop Loss due to price noise and continue moving in the desired direction.
Hunting for Stop Losses on Forex
Among traders, the theory of ‘stop hunting’ has long been cultivated. There are many proofs and refutations of this theory, and you can believe it or not. However, some points should still be considered.
Essentially, the average trader has almost no impact on the movement of a currency pair. As one participant of our Forex forum put it: ‘Move the market with our coins!’ Nevertheless, there are large players on the market who directly influence currency movements. For example, a major bank buying or selling a large volume of currency can easily shift quotes by 10-30 pips. The history of ‘Soros vs the pound’ is quite instructive in this regard. Obviously, operations like the one Soros conducted are rare on the market. Moving a currency pair by 50, 100, or more pips is possible only for a limited number of players. However, shifting by up to 30 pips is entirely within the capabilities of major banks and happens quite often on the market.
In conclusion, it is important for a beginner Forex trader to find their own balance when setting a Stop Loss, tailored to their trading style. The Stop Loss should trigger only when the trend changes, not as soon as possible. In other words, a loss should only be realized when there are clear signs that the price is moving against the trade, and the chances of a reversal in the desired direction are practically nonexistent. In other cases, it is pointless to close a trade with a loss.
FAQ
What is a stop loss on Forex?
A stop loss is an order that automatically closes a trade when the price moves against the trader by a certain amount, limiting potential losses.
Why is a small stop loss risky?
A small stop loss increases the risk of being stopped out by normal market fluctuations, leading to unnecessary losses despite a well-analyzed trade.
How do I determine the right stop loss level?
The right stop loss level depends on the currency pair’s volatility, your trading strategy, and the market conditions. It should be placed where it protects your capital without being triggered by normal price noise.
