The Art of the Stop-Loss

By Sean Hyman, Currency Analyst

As we’ve discussed before, you ALWAYS should place a stop-loss on every single Forex trade. But that’s only the first step. You also need to think about where you’re placing your stop-loss.

When minimizing risk, some traders make the mistake of putting the exact same stop-loss on every pair they trade. They never take into account that different currency pairs have different levels of volatility. Some currency pairs commonly shoot up (or down) as much as 300 pips in a single day, while others generally move 50 – 100 pips.

That makes a huge difference, and you need to take this into account when you’re trading.  Let’s take a look, for instance, at the daily charts of AUD/USD (left) and GBP/JPY (right) and measure their volatilities with the ATR (Average True Range) indicator.

GBP/JPY Trades Twice What the AUD/USD Does!

As it turns out, while they look somewhat similar on the chart, the British pound/Japanese yen (GBP/JPY) trades DOUBLE the number of pips that Australian dollar/U.S. dollar (AUD/USD) does each day on average.

So let’s say you like to place a 40 pip stop-loss to be safe. That might work on a pair like the AUD/USD that trades 174 pips a day. But it’s NOT a good idea if you’re trading a pair that zips up and down 352 pips in a day like the GBP/JPY.

Think about it. You are twice as likely to get kicked out of your trade with the GBP/JPY. And if you get stopped out of your trade, then you can never make any profits.

So, instead, look at the volatility for each pair before you set your stop distance. This is what the pros do. It’s pretty easy to figure out how volatile a pair is – simply look at the average true range (which is at the bottom of these charts above) for each pair.

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