Stop loss optimization: 5 steps to increase trading profits

An optimized stop loss gives you three very important benefits: it minimizes the risk in trading, quickly exits a losing trade, allows you to stay in a winning trade. So optimizing the stop loss is crucial for increasing your trading profits.

stop loss optimization

Optimizing the stop loss in trading: 1 – Select a precise entry signal

Selecting an accurate entry signal means that you know exactly what you can expect from the trade. This is the essential first step; many traders find it difficult to define the stop loss also because they use ineffective entry signals. They then try to fix the situation by widening the stop loss, but this does not solve the real problem.

Optimizing the stop loss in trading: 2 – Examine the actual volatility of the market

Average volatility is a useful figure, but it is not enough. It’s important examine how the market actually moves right away after our entry signal, which is a moment with specific characteristics.

Optimizing the stop loss in trading: 3 – Have a standardized procedure for determining the stop loss

Based on precise entry signals and actual market movement, the stop loss must be determined precisely, as the number of ticks or pips or dollars or euros away from the entry point.

Optimizing the stop loss in trading: 4 – Determine the “time stop”

Obviously when you open a trading position, the price must go in the desired direction for it to be successful. With the time stop, if the price does not reach at least the first profit target within a certain time, the trade is exited. In these trades there is a small profit if the price went in the desired direction but did not reach a certain level within a set time, or a small loss if it went in the opposite direction.

Hence the “money” stop loss is rarely reached, because the time stop usually releases before the stop loss is reached. The result of the time stop is that the actual loss is greatly reduced compared to the stop loss.

Optimizing the stop loss in trading: 5 – Build your trading plan before the time comes to actually trade

The trading plan must be constructed in advance, examining the actual movement of the market with precise criteria for a significant period. Technical analysis and fundamental analysis are the basis for all of this.

  • the plan must tell you what signal to enter and what percentage of winning trades you can have; if the trade does not meet the characteristics of the plan, do not enter
  • the trade must have a specific profit target, established in the plan
  • the plan must also establish how many ticks or pips or dollars or euros is the stop loss
  • the time stop indicates how soon the goal is to be reached

With a plan ready before the trade, at the time of making the trade you operate in a faster, easier and safer way because you know exactly what to do from the beginning to the end of the trade, and this also makes the stop loss better managed.

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