Where Is the Best Place for
Stop Loss and Limit Orders?
Stop Loss and its proper position is the question that I have been asked by forex traders so many times.
What is the best place to set the stop loss and limit orders?
Stop loss is a must! You have to have it when you trade even if you are an intraday trader and you sit at
the computer and watch the price movement and all your positions are closed at the end of your trading
Stop loss position is very important. Sometimes having a tight stop loss will be nothing but a loss because it
will be triggered even when you choose the right direction.
Stop loss should be placed in a position that will be triggered only when the direction you have chosen is
absolutely wrong. For example the price is going up. You wait for a reversal signal. The price changes its
direction and starts going down and you take a short position. So the high that the price has made before it
goes down is a resistance.
Now a question: When you will be realized that taking a short position has been a wrong decision and the
price will keep on going up?
Yes; only when it goes up and breaks the resistance. It means it goes up and goes higher than the point
that it changed its direction and went down. Otherwise you have chosen the right direction.
So where should you place the stop loss? A few pips above the pick (resistance) plus the spread.
When you take a short position, you have to add the spread to the value of the point that you consider as
the stop loss because when you take a short position (you sell) you have to buy to close the position and
when you buy you have to pay the spread to the broker. So your stop loss should be a buy order and you
have to add the spread to it. This is very important when you trade with the currency pairs that have a high
spread. If you don’t do that, your stop loss will be triggered sooner and when the price has not gone over
But when you take a long position (you buy), you don’t have to add the spread because you paid it when
Let me shows you some examples.
1. In this example, you take a short position at 211.74. As I explained above, if the price goes up and breaks
the resistance, it means the taken position has been a wrong position. The resistance is at 212.39. To place
the stop loss, I add 3 to 5 pips to the resistance plus the spread.
So in this case the stop loss will be 212.39 + 5 pips + 8 pips = 212.52
2. In this example you take a long position (you buy) at 214.37. The support is at 213.56 and the stop loss will be 5
pips under the support line which will be 213.61.
3. Now lets say you take a long position at 1.4642 after the triangle breakout. As you see in the below chart a
symmetrical triangle is broken up. The big Bullish candlestick is a good confirmation that the triangle resistance is
broken and so you take a long position when this candlestick is fully formed. But where should you place the stop
As you see there is no special rule for stop loss like “your stop loss should be 50 pips under the buy
price…”. Stop loss position is different from one trade to another one even with the same currency pair
and time frame. Sometimes your stop loss will be 20 pips under your buy price and sometimes it has to be
as high as 200 pips.
When you work with bigger time frames you use the above stages to determine your stop loss position but
as the bigger time frames have bigger scales, your stop loss value will be much bigger.
Move your stop loss!
When you see that the price moves to your favorite direction and you are making profit, you should cancel
your primary stop loss and set anther one, higher than the primary stop loss. For example you have bought
EUR-USD at 1.4246 and your primary stop loss is 1.4588. The price goes up for 50 pips. You will have to
move your stop loss 50 pips higher which is 1.4638. Then if it kept on going up for 50 pips more, you will
have to move your stop loss 50 pips higher than the second stop loss.
This is a good technique to maximize your profit when the price keeps on moving to your direction for a
long time. But keep in your mind that it doesn’t mean that you have to wait until the price hits your stop
loss. To protect your profit, when you see a clear reversal signal, you should close your position
immediately and before it hits your stop loss.
50 pips in this example is just an example and is not a rule that has to be obeyed in all trades. It depends
on the conditions and trade. For example when you just open a position at the beginning of a candlestick,
you have to wait for the candlestick to be formed completely and then decide if you want to move your
stop loss or not. You don’t move your stop loss immediately when the price moves to your direction.
Ok! Hope the above explanations were clear enough and you learned how to set your stop loss. In case you
have any question, just leave a comment and I will get back to you shortly.
How about limit?
Limit is a good thing to fix your profit before you lose it and of course it is a good thing to limit and control
your greed. It is better to keep a trade as long as it is moving to the favorite direction and there is no
reversal signal but you can set a limit and fix your profit. You should not get upset if the price keeps on
moving to the same direction for several hundreds of pips after hitting your limit. You are already out of
Determining the limit can be very easy if you make a rule for yourself. For example you say “I will be happy
with 20 pips and want my position to be closed when I have made it”. But it can be hard and complicated if
you want to determine the final destination of the price and set your limit according to it. It is always
possible that the price doesn’t move according to your predictions and so it changes its direction before
hitting your limit. So you have to be careful.
If you like to earn the maximum profit, you have to determine the final destination of a trend. This can be
challenging. First you have to find all the supports and resistances. You have to use the Fibonacci levels in
the best way. When you have a long position, any of the Fibonacci levels can reverse the price and so they
can be your limit.
The only case that is easy to determine the limit is trading a channel which is when the price is moving
inside a channel and goes up and down between a support and resistance line. But even in this case,
sometime the price changes its direction before it hits the limit.
What is OCO?
OCO stands for One Cancel Other. An OCO order includes a stop loss and a limit order. Any of them that
becomes triggered, the other one will be cancelled automatically and so it will not be triggered later.
The last thing I want to say is that keep in your mind that you MUST cancel all the pending orders including
stop loss and limit when one of them is triggered or you have closed your trade by yourself otherwise you
will be in trouble because they will be triggered when you have no position and you are not at the
computer and so they will open a new position and you don’t know where the price will move. It can be
ended to big losses. I have lost a lot of money because of this stupid mistake. So be careful.