How to Determine Stop Loss Based on Percentage of Risk to Capital
Stop loss or cut loss must really be noticed, especially when you will determine where it is based on the amount of risk you can receive and the amount of capital in your account.If the stop loss position is too close to the selling / buying price, your forex trading position will be closed faster due to a momentary price spike, even though the next price movement is in accordance with the results of your analysis.
Based on the experience of trading forex this is very often I experienced and it turns out that I am not the only one who experienced it but other traders also experienced it even though we are in accordance with the principle of risk management that is never to risk more than 2%.
What is wrong?it turns out that what is wrong is the management of the volume of trade contracts that we apply without ever paying attention to the volatility (range) of prices formed.For example, the GBP / USD currency trading has 100 pip volatility per day.
If we have capital in the account of $ 5,000 with an acceptable risk value of 2% or $ 100 if we open a trading position of 100K (for micro accounts).
Based on the calculation, automatically trading platform, every movement of 1 pip will increase or decrease the account by $ 10.So if the magnitude of the tolerance value is $ 100 then it is equivalent to 10 pips.
Only intermezzo, so for the calculation you don’t need to do it manually because your trading platform will calculate it automatically and more accurately 🙂 compared to you who count it.
Then we immediately determine the trading parameters without looking at the nature of the GBP / USD currency pair (known for its volatility), namely the risk of 10 pips ($ 100) according to risk management (no more than 2%) and the number of trading contracts as much as 100K.
And we need to know that trading management like this is a kind of management that is not good!Why?because considering the movement of GBP / USD currency pair prices which are very volatile, the scenario as below can happen very often and later, you will always be hit by a stop loss and often throw away the opportunity to make a profit.
For more details, let’s continue the illustration, based on your analysis that the GBP / USD currency pair will move down or experience a correction after moving up so you open a SELL position of GBP / USD as much as 100K and of course you do not forget to put a stop loss of 10 pips or the equivalent $ 100 (according to the risk value of 2% of total capital).
Just forget that one thing is the GBP / USD currency pair is usually moving with a very wide range of 100 pips or more in a day so it usually happens that the price is spike either because of market sentiment or news.
And apparently what happens is like this,
It turns out the condition is that there is a spike in price and your stop loss is executed (loss – $ 100) by the system and the GBP / USD currency pair moves down as you expect.This means that you have thrown away the opportunity to get a profit because of a momentary price hike.
Hmmm sorry or not?surely you are very sorry and regret it and want to return the time back to the beginning.And you definitely think you won’t put up a stop loss if you know like this 🙂 QUIETLY GAN !I will also think like that if I experience it.
So that regret does not happen, the thing we need to do is implement better management.Never over volume and learn to determine the right trading position.
So if you have opened a GBP / USD currency pair trading position as much as 10K then your risk value (range stop loss) will change to -100 pips.And your account will definitely not be hit by a stop loss because of a sudden price surge.
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