If you’re new to forex trading, one thing I’m sure you’ve already heard a lot about is the stop loss. And if you’re anything like I was when I first started, you might be wondering: “Do I really need to use one?”
Believe me, I asked myself the same question. Early on in my trading journey, I avoided stop losses. I didn’t understand them and thought they were just a way to “limit my potential” instead of protecting me from big losses. But the day I finally learned how to set stop losses correctly was the day my trading changed forever.
In this article, I’ll share how I learned to set stop losses in forex trading and why it was a game-changer for me. Whether you’re a beginner or just trying to improve your risk management, this will help you understand why stop losses are a must and how to use them effectively.
The Early Mistakes I Made (And How They Could’ve Been Avoided)
When I first started trading, I had one big mistake that I repeated over and over again:
I would open a position and not use a stop loss. Every time I placed a trade, I had this mindset of “Let’s see how it goes”—which is a terrible way to approach forex trading.
I thought, “If I’m right, I’ll make money. If I’m wrong, I’ll just close the trade manually later.”
Spoiler alert: That didn’t work out very well.
There was one particular trade that sticks out in my mind. I was trading GBP/USD, and I was feeling super confident. The trend looked great, and my analysis was solid. But I didn’t set a stop loss. After a few minutes, the market started moving against me. I told myself, “It’s just a small dip, it’ll bounce back.”
Then, the dip kept getting worse.
Long story short, my position got so far in the red that I had no choice but to close it manually. I lost a huge chunk of my account—money that could’ve been saved if I had just set a simple stop loss.
That’s when I realized: Stop losses aren’t just for the cautious traders—they’re for everyone. Without one, your risk is completely unmanaged, and it’s easy to let your emotions take over.
What Exactly Is a Stop Loss and Why Should You Care?
A stop loss is a predetermined point where you decide to exit a trade if the market moves against you. Essentially, it’s your safety net. By setting a stop loss, you are limiting how much you’re willing to lose on a trade, which is crucial for long-term success in forex trading.
For example, if you’re trading GBP/USD and set a stop loss 20 pips below your entry point, your loss will be limited to 20 pips if the market moves against you. Even if the market goes south after that, you’re out of the trade and don’t risk further losses.
Here’s why it’s crucial:
Prevents emotional decisions: Having a stop loss in place means you’re not reacting emotionally to every market swing.
Protects your capital: You’ll avoid losing more than you’re willing to risk on a single trade.
Promotes discipline: By committing to using a stop loss, you are forced to calculate your risk before entering a trade.
How I Learned to Set a Stop Loss (The Right Way)
Once I made that big mistake and saw how easily my account could take a hit, I knew I needed to change. I started by learning how to set stop loss in forex trading properly, and here’s what I learned:
Step 1: Know Your Risk Tolerance
Before placing any trade, you need to decide how much of your account you’re willing to risk. This is a personal decision, but for me, I’ve found that 1% risk per trade is a sweet spot. It keeps me in the game longer and ensures that I don’t blow my account after a few bad trades.
So, if you’re risking 1% per trade, and your account balance is $1,000, then your stop loss should limit your loss to $10 per trade.
This risk tolerance will help you decide how far to place your stop loss. If you have a wider stop, you’ll be risking more on each trade, and if you have a tighter stop, you’ll be risking less.
Step 2: Analyze the Market
You can’t just throw a stop loss on a trade randomly. You need to take into account the market structure and volatility.
For instance, if you’re trading a pair like EUR/USD, which is usually less volatile, you might set your stop loss tighter (around 10–20 pips). On the other hand, pairs like GBP/JPY can be more volatile, and you may need a wider stop (30–40 pips) to give the market room to breathe.
In addition, check key support and resistance levels. A common mistake is placing a stop loss too close to recent highs or lows. It’s essential to give the market some wiggle room. Placing a stop loss just a few pips away from the current price can lead to premature stop-outs.
Step 3: Always Use a Stop Loss (No Exceptions!)
This one was hard for me to accept at first, but I’ve learned to always, always use a stop loss. Even if I’m feeling confident, I put it in place. Even if I’m trading on a longer timeframe, it’s still essential. The market can turn in an instant, and it’s better to take a small loss than to ride a position all the way down.
There was one time when I had a great setup on AUD/USD. I was so confident that I didn’t set a stop loss, thinking I could just manually close the trade if it started going against me. Well, it didn’t just go against me—it tanked. I ended up taking a much bigger loss than I would’ve if I’d used a stop loss.
Now, I stick to my rule: No trade without a stop loss.
Step 4: Adjusting Stop Losses and Using Trailing Stops
As I gained more experience, I learned to adjust my stop loss as the trade moves in my favor. For example, if I’ve entered a trade and it starts moving positively, I might move my stop loss to break-even (the price I entered at). This locks in a no-loss scenario if the market reverses.
Another tactic I use is trailing stops. This is where you adjust your stop loss to follow the price as it moves in your favor. If the price moves 20 pips in your favor, you might move your stop loss 20 pips in profit. This helps lock in profits if the market continues to move in your direction, but it also protects you if the market reverses.
Why Stop Losses Are a Lifesaver
After learning how to set stop losses correctly, I’ve had a much more consistent and stress-free trading experience. Here’s how they’ve helped me:
1. Minimized Losses
Without a stop loss, I would’ve let my losses spiral out of control. Now, if the market moves against me, I know exactly when I’m out of the trade, and my risk is controlled.
2. Reduced Emotional Stress
I don’t constantly watch every tick of the market anymore. With a stop loss in place, I know that my risk is limited, and I can walk away without worrying about losing more than I’m comfortable with.
3. Increased Confidence
Knowing that I’m trading with a risk management plan makes me more confident. I’m no longer scared of taking a loss because I know that each trade is calculated, and one loss won’t destroy my account.
Final Thoughts: Embrace Stop Losses Early
If you’re just starting out in forex trading, don’t skip setting stop losses. It’s a simple but powerful risk management tool that will save you from emotional trading and prevent unnecessary losses.
Learn from my mistakes: Never trade without a stop loss.
If you’re still not sure how to set one, start with a basic strategy—1% of your account balance per trade—and build from there. Eventually, stop losses will become second nature, and you’ll be able to trade with more confidence and less stress.
Trading isn’t about avoiding losses—it’s about managing them wisely. And stop losses? They’re your best friend.
Next Article To Read: How I Set My Take Profit Levels Without Guessing