Experiences in forex trading, by a special way.

November 22, 2022

When to move stop loss?

When to move stop loss? Should you move your stop loss to entry point? Is it safe to move stop loss? This article will answer these questions.


Typically, traders have the following ways of dealing with a stop loss when entering a forex trade:

1. No stop loss: This is the case where the trader has a very large amount of capital in the account, and the volume of the order is very small compared to that capital. In addition, traders regularly observe market movements, and observe the status of their orders. So it might make sense for them not to place a stop loss. This way we often see in new traders, or only in traders with a lot of experience.

2. Set stop loss at a fixed and unchanged price: In this case, the trader has analyzed the market very carefully. When they entered the trade they determined where the exact stop loss was. And after placing an order with a stop loss, they let the market move on its own. This way we often see in the forex market.

3. Set a stop loss when entering a trade, but will move the stop loss depending on the market's movements: This case I consider the most optimal. However, it is necessary to move the stop loss properly, and it will be very suitable if you are trading at a reputable broker, plus the additional factor that you are trading with a medium to long term strategy (target profit is not too short).

In this 3rd case, there are 2 smaller cases that will occur, including:

    3.1 When the order is losing: Traders have the habit of moving their stop loss further away when they see more and more losing trade. I advise not to do so, because when you are wrong, look at the truth and do not be stubborn. If you move your stop loss further, the probability of you losing more will be much higher, compared to the probability that the price will turn around to go to the finish line.

    3.2 When the order is profitable: This is the most important issue that this article will cover. When your trade is profitable, it means that you have predicted the market correctly. So, you need to optimize the profit of this trade, and at the same time minimize the risk for it.

In the market you often meet traders who have the habit of seeing a trade order running in the right direction and making a profit, immediately moving the stop loss to the entry. They explained that, after doing so, their trading order only had 2 possibilities: a draw or a win, no possibility of losing anymore.
This sounds very reasonable. However, upon closer analysis, that approach does not seem to be optimal, for the following reasons:

- If the order has only a small profit, the possibility of the price swinging back to the entry point is very high, then the possibility of touching the stop loss is high. Although the order is a tie, there is no loss of money, but the transaction fee, analysis time, and trading psychology is affected.

- If the price returns to the entry point, and then moves in the same direction as originally predicted, it is really a pity. Because, instead of you winning, you end up in a draw.

- In addition, your position is profitable, you will lose the advantage of your order, because it is profitable and moving in the right direction.

Thus, moving the stop loss to entry is merely a psychological solution, it does not carry technical analysis elements, is not based on the actual movements of the market, especially important technical levels on the market price chart.

Here's how and when to move stop loss, in my experience:

With 1 SELL command:

- The method of placing stop loss and take profit when entering an order should follow the method based on technical levels (tops and bottoms), described in detail in this article: https://www.caphile.com/2022/11/how-to-set-stop-loss-and-take-profit-in-forex-trading.html. The initial stop loss and take profit setting like this, applies in case you are not able to follow the market and follow the trade continuously. When you have time to monitor the market's movements, you will consider the following factors.

- After entering the order, the price drops and the order is profitable, then you should not move the stop loss to your entry point, but need to keep watching, the price after falling will start rising until the end of that bullish wave (correction), then it drops again. So, if the top of the bullish (correction) wave is lower than your entry point, you should move your stop loss to entry. Because usually the price will continue to break through the newly created low, and it will drop in new waves, then your stop loss at the entry is safe. Of course, if the top of that rally is much lower than the price you entered, you can move your stop loss back to that top, so that in the event of a stop loss you still have a profit, not just a tie. However, the top of this bullish corrective wave is only identified after the price has made a real top and has made a significant pullback (at least 50% of the previous bullish wave is considered significant).

- After moving the stop loss to a new lower high, the price continues to fall to create new lower highs, then you continue to move the stop loss to the lower high area. Thus, the stop loss will be flexible to follow the market.

- With this application, there is a rare case that even though the stop loss is moved, the price still hits the stop loss and turns to decrease in the direction initially identified. This is inevitable, as nothing is absolute. However, with this way of moving stop loss is the most optimal, it is consistent with the principles of technical analysis and also Elliott wave theory.

- Note that the exact stop loss should be calculated with the spread and "noise" of the price (about 5-7 pips).

With a BUY order, it's the exact opposite.

Here is an example image:
Let's see the price chart of the Eur/Usd currency pair, at the daily time frame:


If you enter a sell order from point A to point B, place a stop loss above level 1. After price makes a peak of 2 and falls, move your stop loss above level 2. Just keep following the market trend like that... Eventually your trade will hit the stop loss at 8. And the profit of this order is not small.

Good luck.

Best regards,

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