A profitable trading strategy includes a stop loss.
It reduces the risk of being wrong and preserves capital to help you take advantage of every opportunity.
This tutorial will explain how to calculate your risk based upon your maximum risk.
Calculate Your Stop Loss
First, measure your stop loss in dollars or in pips. Or in whatever format your chart is.
This formula will calculate your exact stop loss.
ABS(Entry – Stop Loss) = Risk
It doesn’t really matter if the risk number is positive or negative. The absolute value (ABS), of the entry price less the stop loss price, is what you should be using.
Let’s look at some examples from different markets. The line is the stop loss in each example.
Stock Trading Example
If you trade stocks from the USA, your risk will be measured in dollars.
This example shows that the stop loss is set at 67.50, and the entry price is 59.5.
This trade is short and makes money when the price falls.
So the risk is: 67.50 – 59.60 = 7.90.
Forex Trading Example
Forex risk is measured in pip or pipettes depending on the broker’s quotes prices.
The price is listed in the second currency pair, or…