Stop Losses really can be an Achilles heel in trading, especially day trading the leveraged move made in the forex arena, and every trader wants to always find the ideal place to put them. There is no direct, coverall answer to where, and in reality the correct stop may require just as much work as the exact target placement. It is a shame but there really is no easy fix to this, and relies as much on the time that the trade is placed as well as the likely market momentum at that time.

Market conditions dictate the depth that a stop needs to placed away from an entry point; In current conditions, with a lot of volatility, some stops may need to be at a 1:1 Risk to Rewards (in other words to be risking 50 pips in an effort to gain 50 pips). As markets start to trend, that may go to risking 30 pips to gain 60 pips, and the Risk/Reward increases to 1:2. Over the course of a traded year the average Risk/Reward will likely be between 1:1.5 to 1:2, with some times of constant 1:1 risk/reward, and others with runs of 1:3.

To go with a 1:1 Risk/Reward a trader obviously needs to have more than 50% winning trades to get above break-even. With a 1:2 Risk/Reward a Trader can be right 50% of the time and still be very profitable. Therefore market conditions are incredibly important, as is the need to work on money management. A stop area needs to be found first, and then the amount of lots traded worked from that pip count.

For example; if a trader commits no more than 2% of their $10k account balance on any one trade, they have a risk exposure of $200. If the Stop area is 20 pips away they can trade 10 mini lots ($200 divided by 20 pips). A stop that needs to be 50 pips away, because of market mechanics equates to 4 mini lots ($200 divided by 50 pips). Downloadable Excel Stop/Risk Calculator

In current conditions, with the need to have bigger stops because of the thin volume and a tendency to whipsaw before committing, it is important to start with the target area. Ask yourself how realistic really is the amount that you are aiming for? Your entry must be breaking some kind of previous support or resistance to generate momentum to get you as quickly to the target as possible. If it is realistic, and for example 50 Pips away from the entry, then you may need to allow up to 50 pips as a Stop.

Take stock of the weekly moves that this pair makes, and compare that to the daily trading range (deduct the high from the low). Understand that if a pair moves 80 pips each day on average, that to set a target that tries to capture all of that may be very difficult in one go.