How to Set Stop Loss Order

Watch this instructional forex video about determining where to set your stop loss after you have opened a trading position.

Setting your stop loss order for an open position should be based off of how your order entry relates to the overall trend, not a pre-determined amount of pips. Using this logic will ensure that your position will only be closed for a loss in the event of a trend break.

Step 1 – Identify the Trend

First determine if your trading sentiment believes that an uptrend or downtrend is in control of the market, and market time frame you are trading in.

If Buying into an Up Trend

After a new high is made, wait for price action to consolidate and dip back down. The low in price will be higher than the last low, and provides a great opportunity to enter a buy, or “long” trade.

Once the order is placed, set your stop loss below the last major low point that occurred in the trend. This could be 20 – 100 pips or more from your entry, dependent on what currency pair you are trading.

If Selling into a Down Trend

After a new low is made, wait for price action to consolidate and shoot back up, attempting to make a new high. Once price stalls short of the last high (called a failed rally), place your sell or “short” order.

Once the order is placed, set your stop loss above the last major high that occurred in the downtrend. This could be 20-100 pips or more above your entry, dependent on what currency pair, stock or commodity you are trading.

This strategy of placing stop loss orders behind the last low or high in price action will work in any sort of market trading type; including forex, stocks, bonds, commodities and cryptocurrencies.