How to deal with the opening signal of a large stop loss?
This issue is very practical, and we often encounter it in real combat. If the stop-loss space is too large when opening a position, two problems will arise:
One is the issue of money. With a large stop-loss space, the amount of loss will also be large. A single significant loss can affect the overall profitability of the trade.
The other is the issue of mentality. Because the amount of loss is large, it can generate a fearful emotion, causing traders to hesitate to open positions, and in the process of hesitation, they may miss trading opportunities.
In real combat, how should we handle the opening signals with a large stop-loss? There are two relatively common methods that I would like to share with everyone.
1: Quantify based on the loss, adjust the position size according to the size of the stop-loss space.
This operation method assigns a fixed stop-loss amount to each order, for example, a stop-loss of $1000 or $2000 each time. Some traders are accustomed to using a fixed percentage of the principal, such as a stop-loss of 1% or 2% of the principal each time. For example, if the principal is $50,000, 1% is $500, and 2% is $1000.
The formula for calculating the position size in this operation mode is: stop-loss amount / stop-loss points = position size. I will directly use an example to explain this to everyone.
The chart shows the 15-minute candlestick chart of the British pound against the US dollar. The entry is made after breaking above the consolidation pattern, with the stop-loss set at the low point below, and the stop-loss space is 300 points.
Assuming the stop-loss amount is $1000, then the position size for this order is: $1000 / 300 points = 3.3 lots.
With this calculation formula, when encountering an opening signal with a large stop-loss space, you can use this formula to calculate the position size for opening, achieving stress-free opening.The chart shows a 15-minute candlestick chart of spot gold, which is also an entry after a break above the consolidation pattern. The stop loss is set at the low point below, with a stop loss space of 1000 pips.
Assuming the stop loss amount is $1000, the position size for this order would be: $1000 / 1000 pips = 1 lot.
We now compare two patterns, one with a stop loss of 300 pips and the other with a stop loss of 1000 pips. Both can be entered easily, and the stop loss amount is the same. Even if the order with a larger stop loss space is stopped out, the amount will not increase, and there will be no psychological pressure during trading.
2: Switch to a smaller time frame for entry.
The size of the stop loss space for a trading signal is closely related to the candlestick cycle. For the same trading instrument and the same stop loss technical criteria, the larger the candlestick cycle, the larger the stop loss space.
In practice, if a signal with a large stop loss space is encountered, the stop loss space can be reduced by entering at a smaller time frame.
The chart is a candlestick chart of spot gold, with the left side being the 1-hour level and the right side being the 5-minute level.
On the left, at the 1-hour level, the market forms a top consolidation. If you enter directly near the broken trend line at 2380, the stop loss is above the high point, with a stop loss of 2400 pips, which is too large.
When the market tests near the break point of 2380, switch the candlestick to the 5-minute level, where a descending triangle consolidation pattern is formed at the 5-minute level.
Enter on the break of the 5-minute pattern, with the stop loss at the high point of the 5-minute level. The stop loss space is 800 pips, which is reduced to one-third of the original, making the stop loss amount smaller, the psychological pressure of the stop loss is reduced, and the difficulty of executing the trade is lowered.Of course, it is also a reminder here that when you scale down to a smaller level to enter the market, the space for stop-loss becomes smaller, which increases the overall profit-to-loss ratio of the trade. However, because the stop-loss space is reduced, it can also lead to a decrease in the success rate of trades, and one must be mentally prepared for this in practice.
Nevertheless, significantly reducing the stop-loss space increases the difficulty and feasibility of executing trades, which is very worthwhile.
The above two methods are the most common ways to deal with large stop-loss trading signals. Comparatively, I would recommend the first method more, as it is simple and convenient to execute, with lower technical standards, making it easier to follow.
In fact, for today's issue, there is an even simpler approach, and that is to abandon signals with large stop-loss spaces.
Traders should not be attached to anything. If the stop-loss space for a trading signal is too large and it causes stress, then set a standard, for example, do not enter any trades where the stop-loss space exceeds 1000 points, and trade normally for orders with a stop-loss space within 1000 points. As long as consistency is maintained, abandoning these signals that cause too much psychological pressure and doing well with other normal signals is sufficient. Isn't that the case?