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How to calculate your stop loss in Metatrader 5

When it comes to risk management, knowing when to exit the trade before you even place it is one rule you should always follow. Doing this by using stop loss and take profit orders is the safest way to go.

A stop loss is an order that tells your broker to exit the trade with a calculated loss.

Most traders hate exiting the market with a loss and whenever they hit a losing trade. They choose to hold on to their chairs and pray that the market will make a U turn and take their trades in blue (profit).

Doing this is the most dangerous thing a trader can do.

More often than not, the market will hurt your account so much if not wiping it out before turning

To be honest with you, those who are successful in trading are also losing trades but they just know how to be good losers.

You can only be successful by implementing risk management to your trading and the first thing you need is knowing about stop loss orders.

What is a stop loss and why do you need one?

A stop loss is a technique used in forex and stock trading to minimize losses in the event of a sharp decline in the price of a security.

It works by selling an instrument when it reaches a pre-determined price. This limit is set to ensure that the investor does not lose more money than they are willing to in a particular trade.

There are two main reasons why you might want to use a stop loss:

  1. To protect yourself from further losses if the stock continues to drop
  2. To lock in profits on a security that has already increased in value.

How to calculate a stop loss for your trade

I am going to assume that you are using DMT5, if you aren’t using one then consider creating an account here

As we already said a stop loss is an order that automatically pulls you out of the trade with a loss, it means you as a trade need to know the amount that you want to lose on a trade before placing a trade. 

On the other hand you also need to know the amount you are willing to win if the trade goes into your favor.

In the following example I will assume that you only want to risk $10 per trade to win $15 which is a 1:1.5 risk to reward ratio.

To calculate your stop loss you first need to know where are you putting it and how many pips are there from you entry.

For example in the example in the picture below, let assume that you want to enter the market with a buy EURJPY  132.450.

 The next step is to determine where to put your stop loss and let’s assume that you are going to use a price action and decide to place it below the recent low of the market.

 So you will need to know how many pips are they from where you want to put your stop loss and the entry.

So lets assume that you will put a stop loss at EURJPY 132.130.

Now if we say 132.450 minus 132.130 we will get 0.32 which is 32 pips in a JPY pairs.

Now we know how many pips are we risking per this trade. But how do we risk $10 as 32 pips and which lot size do you use?

Here is how..

If you want to risk $10 as 32 pips then $1 needs to be 3 pips

So if $1 is 3 pips then 1 pip is 0.35cents

So you can use a 0.03 as your lot size.

Remember a 0.01 lot (micro lot) is worthy 0.10c per pips. So if you use 3 micro lots here you going to get a 35c per pip

Remember forex is a numbers game so you need to understand this things and if you haven’t understood yet then maybe you need to reread this part

If you want a free position size calculator to calculate your lots and stop losses to use the you can join Deriv for free to get their calculator and more tools

Join Deriv here

What are some tips for using a stop loss?

A stop loss is a great way to protect your investments. It’s an order you place with your broker to sell a security if it falls below a certain price. This helps limit your losses if the stock drops suddenly.

There are a few things to keep in mind when using a stop loss:

  1. Make sure you set the stop-loss price at a level that is reasonable. You don’t want to sell your stock for a loss if it only drops a little bit below the price you set.
  2. Be prepared to sell your stock if the price falls below your stop loss. If you wait

What are some common mistakes traders make with their stop losses?

There are a number of common mistakes traders make with their stop losses. One mistake is to not use them at all.

A lot of traders mistakenly think that they don’t need stop-losses because they are “good” at picking tops and bottoms. This is a dangerous way to trade because you can easily get stopped out of a trade if the market moves against you.

Another mistake is to place your stop loss too close to your entry price. This can leave you vulnerable to getting stopped out prematurely if the market moves in your favor. A better strategy is to place your stop loss a little bit further

Conclusion

This article explained how to calculate your stop loss and gave an example of how to use it. If you are looking to protect your investment, it is important to set a stop loss. Comment below and let us know how you use stop losses in your trading strategy.

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