August 4, 2015

How Do You Set A Stop Loss and How Much to Put Into a Trade?

We use a spreadsheet to calculate stop-losses and how much should be placed in each trade.

Let me explain the columns below. You can also download the spreadsheet (you can input your own numbers into column E, F and it will tell you how much pounds per pip risk you should take.) Stoplossesspreadsheet

Column A tells you the currency.

Column B tells you the time frame eg M5 means each bar is 5 minutes

Column C tells you the ‘Average True Range’ or ATR. This is the average a price moves in 5 minutes. For instance the EUR/USD in any given 5 minutes the price moves around 3 pips to 8 pips.

Column D tells you what stop loss you should set when you enter the trade. This is useful if you are not going to be in front of the computer. This is based on the fact that if a price moves more than double it’s ‘average true range’ ie ATR then it is not just daily ‘noise’ movement, but something more significant. Now instead of having you look at the ATR and calculate it daily (which is the way we do it), I’ve simplified it and made an estimate based on the currency and the time frame.

Column E you can input, but I’ve assumed you have £10,000 total risk capital in trading.

Column F tells you the maximum loss you want to suffer in any trade, you can change this, but we use 1% of our total risk capital (ie the number in column E).

Column G tells you based on those columns how much you should risk per pip.

What if you want to set a ‘take profit’ or limit order. Column H tells you how many pips from entry you can put it. Again, Pips Predator tells you when to exit, but this is if you do not want to be in front of the screen. Equally, you could use this number as where you add additional positions (ie every time you get 1% of your risk capital in profits by capturing 10 pips from entry) you add an additional position.

Currency Time Period Average True Range Stop Loss in Pips (if 2 x average of ATR) Risk Capital Total (Assume) Maximum Loss Per Trade Pounds Per Pips Per Trade Limit Order (take profit)
EURUSD M5 3-8 pips 10 10000 1% 10.00 10
EURUSD M15 7-13 pips 20 10000 1% 5.00 20
EURUSD M30 4-35 pips 40 10000 1% 2.50 40
EURUSD H1 9-40 pips 30 10000 1% 3.33 30
EURUSD H4 30-80 pips 90 10000 1% 1.11 90
GBPUSD M5 5-13 pips 20 10000 1% 5.00 20
GBPUSD M15 4-14 pips 15 10000 1% 6.67 15
GBPUSD M30 6-23 pips 20 10000 1% 5.00 20
GBPUSD H1 10-37 pips 30 10000 1% 3.33 30
GBPUSD H4 33-50 pips 80 10000 1% 1.25 80

What if you don’t want to use Column D’s estimate of ATR? You can simply find the correct exact ATR from MT4. See the image below, and use that number in Column D. But that takes more time, most traders use the estimate.