Stop-Loss Guidelines: Not Too Far Away
In this video, Roger Hawes, an analyst at Corellian Academy, discusses a common misconception about stop loss orders, emphasizing how placing them too far away is not the most effective strategy. Instead, he introduces the concept of a risk-reward strategy to demonstrate the importance of placing stop losses at the right level with an illustration of a trade example, emphasizing the significance of proper risk management.
An example is illustrated, when a trader makes a buy at 130.50, identifying support lines at 129.80, 129.55, and 129.15. Choosing 129.80 as the stop-loss level, the stop loss is set at 129.75, indicating a 75-tick risk. In addition, Hawes discusses the common mistake of prematurely taking profits, which negatively impacts risk-reward.
According to Hawes, traders should aim for a risk-to-reward ratio that is at least one to one, which advocates patience when waiting for potentially higher profits. The importance of adjusting stop-loss distances based on trading style and duration is stressed while warning against setting stop losses too far away, which can lead to wasted capital and missed opportunities.
Using staggered entry orders, a strategy to improve risk-reward ratios by strategically placing orders at different levels is suggested. By doing so at different levels, traders may be able to optimize risk-reward ratios.
In conclusion, Hawes advises traders to maintain a positive risk-reward mentality of placing stop losses at the right level. Properly structured trades with balanced risk and reward ratios reduce the likelihood of holding onto losing trades for too long and potentially increase overall profitability.
