What are the pros and cons of trading with large stop losses? A significant part of forex money management is deciding whether you are going to place a large stop loss or a tight stop loss?
In both cases, you need to decide:
- how much percentage of your trading account you are going to risk in that trade
- and then also calculation the size of your stop loss in pips which will equate to the amount you are planning to risk in that trade and if that is going to be a large stop loss or a small tight stop loss
When you come to think of it, these are the different techniques you can use to approach forex trading when it comes to placing stop loss orders:
- aiming for smaller profits with tighter stop loss orders
- aiming for large profit targets with large stop loss orders
- aiming for larger profits with small stop loss orders
- aiming for small profits with large stop loss orders
Every forex trader is different because some of you may not like placing large stop loss orders or some of you may not like to place small stop loss orders.
Here Are Some Points To Know:
- If you are scalping or day trading, then your stop loss is going to be small.
- If you are swing trading or trend trading, then your stop loss has to be a bit larger.
- Not all currency pairs are the same, currency pairs like GBPCHF and GBPJPY that have large spreads as well as volatility so placing a small tight stop loss work word effectively therefore you need to increase your stop loss size to account for these types of currency pairs because if you place them too close, you will get stopped out easily.
5 Advantages of Trading With Large Stop Losses
- Less chance of your trade getting stopped out too early
- less pressure on you as a trader because you won’t be regularly checking to see if your stop loss is hit or not.
- if you risk 0.5% to 1% of your trading account with a large stop loss, you will be really indifferent to the trade and you’ll let the market run its course to see the trade come to fruition or not…and there’s not pressure at all when you trade with very small risks.
- trading with a large stop loss means you give the market room to “breathe” and making sure the market truly travels in the direction it was meant to go.
- if the large stop loss is hit then it means that the market has most likely change its direction (Its better than placing a small stop loss only to be hit and out of a trade and then see the market price move in the main trend direction it was going on previously!)
4 Disadvantages of Trading With Large Stop Losses
- If your trade is currently having a paper loss and depending on how much margin you have left, can’t trade because of your forex broker’s margin requirement to open a new position.
- that means you may miss high probability trading setups that come your way because of your margin requirement
- A trade with a large stop loss generally takes a lot more time to hit its profit target so if you are an impatient trader that cannot wait to see the market play out, this may be a challenge.
- trading with large stop loss with large risk…this is a “NO-NO” and if you do this, it can be emotionally stressful.