Where Should Day Traders Put Their Stop Loss?

The actual place is not as important as understanding the process for finding high probability stop loss levels. Focus on getting the process right first.
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Day Traders And Identifying Best Stop Loss Levels

We just have a quick question here from Faha asking us where is the best place to place a stop loss for a day trade? Is it below the first or the second swing point?

When looking at stops, we prefer to again keep things very simple. But we also do prefer to give the trade enough space to play out and don’t usually like placing very tight stops for that reason.



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So, looking at, let’s look at the entity CAD for today for example, we preferred entry somewhere in this overall support area. And that would mean that we would look for the most recent swing for a potential stop loss.

That is the general consensus out there, but we don’t really like to use that first swing point because that is where most people will have their stops for their trade. We like to use the second swing or the second fractal away from the entry for our stop loss.

Now, having said that even though we prefer the second one, sometimes we might consider a first swing or even a third swing away. If there is a let’s say a major key level that would be a better anchor for a stop. So for example, let’s say we wanted to place it here but then we see there’s a major, major psychological level.

We might decide to take it just a little step back or, let’s say between this level and this level there’s a major psychological level here, we might prefer to place it just below that level instead of that swing. So, it does differ apart from looking at the second swing we also look at the ADR of course or the average daily range for the particular pay.

Now even though we like using that second swing, in a general sense the ADR might mean that we can consider a first or again and may be a third swing away from the entry based on the ADR of that particular base. So for example, if we take an entry and the first two swings points is well within that ADR range.

So, let’s say we took this entry but the ADL low is heading, somewhere over here. Then the highest probability opportunity for us to use for stop loss would be outside that range which would mean the third swing away from the entry. Now apart from that it’s also important to remember that we like to trade unleveraged or with a one to one leverage.

Now that means for every thousand dollars in your account you can only trade one microlight, for every $10,000 you can only trade a mini lot et cetera. Now that way, roughly speaking a hundred pips movement will normally equate to about 1% of a total movement of your account.

So having said that, there might be times that the volatility of a pay might mean, that your stop loss can be 200 or 300 pips away for a day trade. Which, if your stop was hit and you traded at a one-to-one leverage, that would equal to like 2 or 3% loss. Which is a little bit excessive for day trade.

So in those cases you can simply buy to adjust your position for the volatility. That means even if your stop loss is let’s say, 300 pips away. You can adjust your position or your lot size so that you can only still risk, 1% or less than that for that particular trade. Now this might even be helpful for a more flatter equity curve as well due to the distribution of your trade. So it might be better to better adjust that position to bring it more in line with the average daily range, of that particular instrument again coming back to that ADR.

So, another important point to can insider for stop loss placement, is the sentiment in itself. Which often provides the very best stop loss for a trade. So for example, the moment the sentiment for entering a trade changes, that’s normally the bast time to use as a stop loss, to just get out of the trade.

Personally, I always have a hard stop in place for my trades. But I very seldomly allow that full stop loss to be hit. Because normally, whenever you see the same sentiment moderate or changing the sentiment, you can just go ahead and take off that position because the reason why you entered, has changed.

The actual reason to stop loss is there is really just for you, when you can’t be at the screen to closely monitor that position. So let’s you’re at work and you can’t monitor it, or there is a major unexpected volatility event that causes huge spikes. In those cases you want that stop loss there, to protect your account.

But, normally speaking what you do is you would basically just take that off, the moment the sentiment changes and not necessarily at that hard level



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