❗️How To Set A Stop Loss Based On A Percentage Of Your Account
The percentage-based stop uses a predetermined portion of the trader’s account.
For example, “2% of the account” is what a trader is willing to risk on a trade.
The percentage risk can vary from trader to trader. More aggressive ones risk up to 10% of their account while less aggressive ones usually have less than 1% risk per trade.
Once the percentage risk is determined, the forex trader uses his position size to compute how far he should set his stop away from his entry.
☝️You should always set your stop according to the market environment or your system rules, NOT how much you want to lose.
We bet you’re thinking right now, “Huh? That doesn’t make any sense. I thought you said that we need to manage risk.”
We agree that this sounds confusing, but let us explain with an example.
You have a mini account with $500 and the minimum size you can trade is 10k units. You decide to trade GBP/USD, as he sees that resistance at 1.5620 has been holding.
As per his risk management rules, you will risk no more than 2% of your account per trade.
At 10k units of GBP/USD, each pip is worth $1 and 2% of your account is $10.
☝️But GBP/USD moves over 100 pips a day! You could easily get stopped at the smallest move of GBP/USD.
Because of the position limits your account is set to, you are basing your stop solely on how much you want to lose instead of the given market conditions of GBP/USD.