Dangerous mistakes when placing stop losses

Dangerous mistakes when placing stop losses

2023-01-26 • Updated

It is not a secret that it is necessary to place stop losses when you trade. It's worth mentioning that it is one of the main tools of risk management. However, it is also important to understand how to place stop orders correctly. If you don’t follow the simple rules of risk management, you will lose money very fast. Let’s find out the biggest mistakes you can make while placing stop losses and learn how to avoid them.

What? Don’t you know about stop loss, this precious guardian angel of every trader? Then you should definitely read our Forex guidebook!

1st mistake: Place a very tight stop loss

1-01.jpg

As you know, the price is a tricky thing, which may fluctuate before moving in the desired direction. If you place very tight stop losses (very close to the entry point), you may be affected by sudden volatility in the market, which could cancel your stop loss. As a result, you would miss a good opportunity to enter the market.

Imagine that you were trading gold. You noticed that RSI left the overbought zone and MACD formed a bearish divergence with the price. You decided to open a short position at $1,341 and placed a very tight stop loss at $1,345 (based on the previous consolidation around this level). The price indeed went down and made you happy. Suddenly, bulls came into play and tried to push the price higher. They did not succeed, but that unexpected attack canceled your stop loss. As a result, you missed a good opportunity to enter the market. 

2-2.jpg

That is why it is very important to take volatility into account.

2nd mistake: Placing too wide stops

1-02.jpg

Another common trader’s mistake is connected with too wide stop losses. If you set stops too far, you increase the number of points your position needs to move in your favor to make the trade worth the risk.

To avoid making this mistake, always consider your risk-reward ratio. The risk-reward ratio determines your potential reward for every dollar you risk.

For example, if you have a risk-reward ratio of 1:3, it means you’re risking $1 to potentially make $3. With a good risk to reward ratio your stop losses and take profits will be connected with your position size and you would be more likely to end up with profits.

On the chart below, RSI rose to the upper border of the oversold zone. You decided that the reversal was coming and opened a long position at 0.7020. You were so greedy and confident in the market and your forecast that your placed your take profit at 0.7124 and stop loss at 0.6973. As a result, the next candlestick went down and you experienced losses.

1-1.jpg

3rd mistake: Place stops exactly at support or resistance

1-03.jpg

Placing stop orders exactly at the support/ resistance levels may be dangerous, as the price may return to these levels after the breakout and trigger your stop before heading your direction.

On the EUR/USD chart, the break of the support at 1.2214 was inevitable. Finally, the negative news for the EUR on April 23 resulted in a breakout. You placed stop loss at the support level right after the breakout.  As the price decided to move back to the 1.2214 level, your stop was broken. If you are not fast enough, you will miss an opportunity for entry. It’s also worth mentioning that in the example below you placed your sell order exactly at the support level. As a result, the price bounced from it. You should be careful and do not open your order exactly at support/resistance levels.

1-06.jpg

4th mistake: Not determining your stop placements in advance

1-04.jpg

It’s quite obvious, but sometimes traders do forget about it. You should know about your exact entry point, profit targets and stop losses before you open a trade. This strategic step removes any emotions from the decision because you haven't risked any of your capital yet.  You simply look at the chart and analyze the further direction of the price. 

5th mistake: Moving your stop to break even or marginal profits ASAP

1-05.jpg

Sometimes, if you see that the market moves in the desirable direction, you get too excited and move your stop loss without proper analysis of the situation. It may result in unexpected losses.

If you make an entry, you should be able to tell about the stop loss level: "If the price went above/below this level, then my reasons for entry would be disproved by the market, thus, my current analysis would be wrong." You need to stick to your original plan. It helps to overcome the emotional trading.

Move your stop-loss only if the market proves you need to do that. For example, if the certain support is broken and indicators signal further fall, it may be a good decision to move your stop a little bit lower. Vice versa, if bulls managed to break the key resistance and other factors show an uptrend, you may move your stop loss higher.

Conclusion

Placing stop losses is very important for every trader. It is a necessary part of every trading strategy. However, this order may play tricks on you, if it is placed incorrectly. Avoidance of the mistakes mentioned in the article will help you to apply stop losses and use it for eliminating risks easily. 

Similar

Forex Trading Plan Example and Definition
Forex Trading Plan Example and Definition

Trading has several levels of complexity, starting from the easiest, like buying and selling random assets, to a more comprehensive one, with deliberate risk management, timing, and objectives.

Frequently asked questions

  • How to open an FBS account?

    Click the ‘Open account’ button on our website and proceed to the Personal Area. Before you can start trading, pass a profile verification. Confirm your email and phone number, get your ID verified. This procedure guarantees the safety of your funds and identity. Once you are done with all the checks, go to the preferred trading platform, and start trading. 

  • How to start trading?

    If you are 18+ years old, you can join FBS and begin your FX journey. To trade, you need a brokerage account and sufficient knowledge on how assets behave in the financial markets. Start with studying the basics with our free educational materials and creating an FBS account. You may want to test the environment with virtual money with a Demo account. Once you are ready, enter the real market and trade to succeed.

  • How to withdraw the money you earned with FBS?

    The procedure is very straightforward. Go to the Withdrawal page on the website or the Finances section of the FBS Personal Area and access Withdrawal. You can get the earned money via the same payment system that you used for depositing. In case you funded the account via various methods, withdraw your profit via the same methods in the ratio according to the deposited sums.

Deposit with your local payment systems

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera