Stop Loss Guidelines: Position Size Relative to Protection
In this video, Roger Hawes, an Analyst at Corellian Academy, discusses how to effectively use stop losses, emphasizing the importance of balancing risk against individual risk appetite. An example involving the EUR/USD currency pair is used to illustrate the concept.
Hawes illustrates a situation in which a trader initiates a long position and the market moves against him, which results in unrealistic losses. Due to emotional reactions and a lack of planning, the trader abruptly exits before the market rallies, which could potentially result in profitable trades.
To address this, Hawes recommends comprehensive planning and preparation before entering a trade. Analyzing past price movements and identifying critical support and resistance levels are valuable sources of information. To make informed decisions during adverse price movements, he emphasizes the importance of understanding market setups.
The next step is determining the appropriate position size based on the trader's risk appetite. Using a simple calculation, Hawes demonstrates that the trader needs to adjust the position size according to his or her risk tolerance so that the potential loss is aligned. With a smaller position size, the trader can remain within the desired risk limit while setting a stop loss at a key support level.
In conclusion, Hawes emphasizes the importance of adjusting the position size to align with the trader's risk appetite, so the trader can withstand market fluctuations, stay in the trade for longer periods, and implement profitable strategies. To maximize profitability, discipline and planning should be prioritized in trading decisions.
