Are you tired of losing money in trading? Trading can be challenging, but it doesn’t have to be. In this guide, we will teach you how to use stop losses effectively to maximize your trading profits while minimizing your losses. We will cover what stop losses are, why they are important, and how to practically calculate them correctly.
What is a Stop Loss?
A stop loss, in layman terms, is the maximum price level that you set to ensure that you don’t lose any more money for the trade you are in. For example, if you decide to buy Bitcoin at $20,000, you want it to go up, but you also want to make sure that if it goes down in value, you don’t lose more than a certain set amount.
How to Calculate Stop Losses Correctly
I started my trading journey back in 2013 and struggled with determining the best stop loss placement. Unfortunately, after three months of using a stop loss of 20-30 pips, I blew up my account. That’s when I discovered the Average True Range (ATR) indicator. The ATR shows the volatility of a market over a certain period, allowing you to set your stop loss based on that volatility. Implementing the ATR indicator in my trading helped me minimize my trading losses.
Using the Average True Range Indicator
To use the ATR indicator, follow these steps:
- Find the ATR indicator on your trading platform (e.g., TradingView) and add it to your chart.
- Set the ATR settings to a 1-day time frame and a 10-day length with a simple moving average for smoothing.
- Hover over the ATR line to see the value. This value represents the market’s volatility over the last 10 days.
- Subtract the ATR value from your entry price for a buy trade or add it for a sell trade. This will give you your stop loss price.
Remember, stop losses are only one part of a good trading strategy. If you would like a step-by-step plan on How you can Start Trading for a living, then check out the Free Training on the 7-Steps to Financial Freedom through Trading. Sign up for this amazing training that will provide you with a comprehensive plan to start trading successfully.