When Would You Use A Stop Loss Order? A Key Lesson In How To Learn Risk Management In Forex Trading

The Investor Diary Entry #74: February 19, 2025

Trading Forex is all about probabilities, and one of the first lessons in my path of knowing how to learn risk management in Forex trading was the importance of a stop-loss order. But unlike many traders who use fixed stop levels, I’ve developed my own way of deciding when and how to use one.

This isn’t a guide on what you should do—it’s about what I am doing. My approach might not suit everyone, but it fits my trading style and risk tolerance.

A stop-loss is a concept and not a number to decide on. Although some might go and decide on a fixed number of pips or points as a stop-loss for all their trades. There is no right or wrong, but this is not my style. This is why it was not included in my article the Three Crucial Numbers In Forex Trading Money Management Strategies. If it was a number it would have diffinately been the forth number.

Why I Use a Stop Loss Order

I see a stop loss as a safety net, not a restriction. My goal isn’t to avoid losses completely (that’s impossible), but to manage them smartly so that one bad trade doesn’t wipe out multiple good ones.

That’s why my risk management rules are crystal clear:

• I risk only 1% of my capital per trade.
• I aim for a 1:2 risk-reward ratio (RRR).
• The stop loss level is unique to each trade.

For me, the market decides the stop loss level—not a fixed number. I analyze the price action, structure, and volatility before setting it.

How I Calculate My Stop Loss and Lot Size

Once I decide on a stop loss level, I don’t just estimate my position size—I calculate it precisely. I use the Cashback Forex Position Size Calculator to ensure my risk stays within my 1% rule.

Here’s my process:

1. Find the best stop loss level based on market conditions.
2. Use the calculator to determine the appropriate lot size.
3. Check if the lot size is 0.01 or higher.
4. If it’s lower than 0.01, I reconsider my stop loss. Can I adjust it slightly while staying within my strategy? If not, I skip the trade and move on.

I don’t force trades. If a setup doesn’t fit my risk parameters, I simply let it go and look for a better opportunity.

Why I Don’t Use a Fixed Stop Loss Distance

Some traders always set a 20-pip or 50-pip stop loss. That’s fine if it works for them, but it doesn’t make sense for me.

I prefer to let the market structure, support and resistance levels, and recent volatility determine where my stop loss should be. This way, I avoid getting stopped out unnecessarily while still protecting my capital.

There’s no absolute right or wrong here—it’s all about what fits your risk management style.

Common Mistakes and How I Avoid Them

Over the years, I’ve noticed common mistakes that many traders make when using stop losses. These mistakes can lead to more harm than good, even when they think they’re being cautious.

1. Setting Stop Losses Too Tight

I’ve done this early on—setting the stop loss too close to the entry price. It’s tempting, thinking that the market will move quickly in my favor. However, this often results in getting stopped out on small price fluctuations.

The lesson? I now give my trades enough space to breathe. I use market structure to identify realistic stop loss levels, and I avoid letting fear drive my decisions.

2. Not Adjusting Stop Losses When Necessary

Sometimes, I’ve held onto a trade even when market conditions change, keeping my stop loss at the original level. This can lead to unnecessary losses when the market moves against me.

Now, I make sure to reassess the trade periodically, especially when there’s a change in volatility or market sentiment. If necessary, I’ll adjust my stop loss in line with the new market conditions, but I’m cautious not to push it too far.

3. Ignoring the Emotional Aspect of Stop Losses

I’ve learned the hard way that emotions like fear and greed play a huge role in trading decisions. When a trade hits my stop loss, it’s easy to feel like a failure or second-guess the decision. But I’ve learned that sticking to my risk management plan is more important than emotional reactions.

After all, risk management is about controlling the loss—not avoiding it altogether.

Different Views on Stop Loss Orders

I’ve come across many traders with different opinions on stop losses:

1. Some don’t believe in stop loss orders at all. They prefer to close losing trades manually, which requires constant monitoring. I can see how this works for experienced traders who know when to exit, but it doesn’t suit my approach. I like having clear, predefined rules.
2. Some hedge instead of using stop losses. They open an opposite position to manage risk. This can be effective in certain market conditions but requires a solid understanding of both positions and their relationship. For me, it’s more complex than necessary, so I avoid it.
3. Some believe the market will always come back. They keep positions open indefinitely, hoping for a reversal. While this could work in some cases, it’s too risky for me. I prefer to limit the potential downside by using stop losses.

I don’t judge any of these methods. But for me, not having a stop loss means unlimited risk—something I refuse to accept.

Lessons from My Trading Journey

Trading is about adapting and refining your approach over time. Here’s what I’ve learned so far:

• A stop loss should give the trade enough room to work but not expose you to excessive risk. I’ve found that using broader stop losses in volatile markets is often necessary.
• Choosing the right stop loss is an art. It’s about finding a balance between safety and opportunity. I don’t treat it as a “one-size-fits-all” approach.
• Accepting a missed trade is better than forcing a bad one. If my position size is too small (less than 0.01 lots), I don’t take the trade. I’ve learned that skipping a trade doesn’t harm my progress, but forcing one can.

The Psychology of Using a Stop Loss

One aspect I didn’t realize early on was the psychological effect of using a stop loss. It’s easy to want to stay in a losing trade, hoping for a turnaround. But the reality is that the longer I hold onto a losing position, the more emotional stress it causes. I’ve learned to view stop losses as a part of my trading strategy, not as a sign of failure.

When a trade hits my stop loss, I don’t look at it as a loss— it’s a calculated risk that was meant to be part of my journey. By sticking to my stop loss strategy, I maintain the discipline to keep going, win or lose.

Final Thoughts

So, when would you use a stop loss order? For me, it’s on every single trade—but in a way that aligns with my strategy. I don’t rely on generic rules; I let the market tell me what’s best.

Risk management isn’t about eliminating losses—it’s about controlling them. And that’s the foundation of long-term success in Forex trading. With discipline and the right tools, like stop loss orders, I can protect my capital and continue to learn and grow.

If you want to follow the series here is the sequence.

How To Learn Risk Management in Forex Trading

List Your Financial Goals

The Psychology of Risk

Risk Per Trade

Risk Reward Ratio Formula

Calculate Forex Lot Size

When To Use Stop Loss Order (This Article)

This is the last article in the series but check the Risk Management Category for more topics on how to learn risk management in Forex Trading.

The Investor

Wednesday 19 February 2025

About The Author

I started to look into individual stocks in January 2022. I created this diary initially for myself to track my investing progress, and second, as a place where I can share my ideas publicly hoping that others will share their ideas and learn from each other, and lastly as an online business where some links that I share are affiliate links, and if anybody bought anything by clicking those links, I will get a commission based on that successful sale, which of course will not affect the price that you are buying the product or service at.

For more detailed information on my affiliate disclosure please refer to the Full Affiliate Disclosure page.

Furthermore, this site is in no way or form giving any financial or investing advice, nor it is encouraging or discouraging people to buy or sell any financial instrument. This is a personal diary in which I track my own progress and share it for informational, educational, and entertainment purposes.