In terms of your long term trading success, proper money management is vital and here, we will look at some basics in terms of placing stop loss orders in the market. Most traders have no idea of how to place stop loss protection correctly and lose money. If you want to win, you need to restrict losses and preserve equity while at the same time, taking enough risk to allow you to make big gains.

The first error most novice traders make is they try to restrict risk so much they end up creating it – they place stop losses to close to their entry price and get stopped out by the noise of the market.

You will often here traders talk about taking 10 or 20 pip stop losses but this is simply not enough risk to take; all that happens is random volatility takes these stops out. Sure you only have a small loss but do this regularly and you will have a lot of losses and get wiped out.

Balancing the Risk to Reward

If you want to make a gain, you need to take a calculated risk and that means placing your stops out side random volatility and if you don't understand the concept of this, you need to learn about standard deviation of price and will find more on this subject in other articles on the site.

Generally I use stops of between 50 – 200 pips and if you say that seems to much for my account – your over leveraged. Most traders think because their broker gives them 200:1 leverage they need to use it all but 10:1 is plenty for most traders and you can still target triple digit gains. When trading Forex, place your stops behind where the majority of traders place them.

Place Your Stops Behind the Losing Majority

A common scenario in the market is for the market to retrace take out the stops and then immediately reverse and go the other way – so place your stop behind the majority and always keep in mind – the majority lose money! You will be giving the market room to breathe by doing this and stay in the big trends for longer.

Risk Per Trade in Terms of Equity Percentage

How much equity should you risk per trade? My own view is on small accounts the common wisdom is 2% but you won't make much money taking such a small risk. Instead, risk 5 – 10% per trade. For all these people saying you should diversify to restrict risk sure you can on a large account but on a small account you should simply be patient, wait for the best trades and hit them hard.

Trailing Stops

When trailing stops in big trends never trail them to close and put them behind resistance at a key moving average or nearby support and a good average to use in big trends is the 40 day MA.

Cut Your Risk by Using Time Stops

You should also consider using time stops as well. Many of the world's top traders use time stops and you should too and the concept is simple – if the market doesn't move the way you think in a certain period of time, you exit the market. How many times have you entered a trade and then become worried that the trade has not broken the way you thought?

I have done it and so have many other traders but instead of exiting the market, I have waited and been hit on stop. Instead of waiting in trades your not sure about, use a time stop to get you out with less risk.

Final Words

Currency trading by its very nature is risky and while you have to take calculated risks to make big gains, the simple tips above will help you employ proper stop loss money management and enable you to preserve equity while at the same time targeting big profits.