WEBVTT 0 00:09.700 --> 00:16.580 Where should I place the Stop-Loss and the take profit? I receive this question almost every day. 1 00:16.680 --> 00:22.770 It is quite funny because sometimes people send me a picture of their trade and ask me where to put 2 00:22.770 --> 00:29.190 the stop loss and the take profit, forgetting that stop loss and take profit should be placed before 3 00:29.190 --> 00:35.190 opening the trade, because they are a fundamental part of money and risk management. 4 00:35.190 --> 00:38.850 So where should you place the stop loss and the take profit? 5 00:38.850 --> 00:42.880 Of course there is no one size fits all answer to this question. 6 00:43.110 --> 00:49.530 But I can share with you some important concepts to understand where to place Stop-Loss and take profit 7 00:49.950 --> 00:55.930 and I'm sure that, by the end of this video, you will completely understand how to place them. 8 00:55.980 --> 00:58.830 So I will not get your e-mails anymore. 9 00:59.130 --> 01:00.980 Just joking. 10 01:00.990 --> 01:07.380 Let's start with the stop loss and I also want to take thirty seconds to explain why I want to start 11 01:07.380 --> 01:10.200 with the stop loss. People approach 12 01:10.200 --> 01:14.100 Forex trading almost for one reason: to make money. 13 01:14.400 --> 01:21.210 So even expert traders, most of times, when they open a new position tend to put the attention to the 14 01:21.210 --> 01:23.820 potential reward that they can get. 15 01:23.820 --> 01:27.160 This is completely normal from a psychological view. 16 01:27.420 --> 01:31.180 Everyone here wants to get money trading the forex market. 17 01:31.290 --> 01:36.150 So it's normal to think of opening a position and get money out of it. 18 01:36.480 --> 01:42.750 But I want to share with you one of the most important tip that a top investor like Warren Buffett can 19 01:42.750 --> 01:44.100 give to you. 20 01:44.130 --> 01:47.420 First rule: never lose money. 21 01:47.430 --> 01:51.600 Second rule: never forget rule number one. 22 01:51.690 --> 01:57.810 In my opinion it is always better to focus on the money that you are risking rather than the money that 23 01:57.810 --> 01:59.300 you can earn. 24 01:59.310 --> 02:06.810 That's why I want to start with the stop loss and then have a look at the take profit. First advice 25 02:06.810 --> 02:13.710 to place your stop loss is: choose a level that the price doesn't reach so easily. 26 02:14.280 --> 02:22.010 The second advice is: place your stop loss at a level that proves that your analysis was wrong. 27 02:22.020 --> 02:30.300 How many times you see on forex forums traders writing: the price always hits my Stop-Loss and then goes 28 02:30.300 --> 02:33.520 back in the direction of the trade I placed. 29 02:33.600 --> 02:38.580 Don't let a random movement or a random news to catch your stop loss. 30 02:38.590 --> 02:45.690 Place it in an area that nullifies your original set up so you will know that if the price goes there, 31 02:45.990 --> 02:53.370 it is because you were wrong about the trend of the market and the price is following the opposite direction. 32 02:53.400 --> 03:00.690 So with the first two advice, I am basically trying to let you avoid a mistake that many aspiring traders 33 03:00.720 --> 03:01.660 make. 34 03:01.710 --> 03:08.160 They want to have the Stop-Loss close to the entry level because in this way they can trade with a bigger 35 03:08.160 --> 03:11.560 position and they can try to make more money. 36 03:11.940 --> 03:19.190 For example, if the correct stop loss is 20 pips and a trader wants to risk 200 dollars, 37 03:19.260 --> 03:23.400 in this case every pip will have a value of $10. 38 03:23.400 --> 03:30.810 Now traders sometimes think that if they choose a stop loss of 10 pips instead of 20 pips, they can 39 03:30.810 --> 03:38.700 double their position, having a value per pip of $20 and still risking $200. 40 03:38.730 --> 03:40.100 This is wrong. 41 03:40.140 --> 03:45.990 A random movement can catch your Stop-Loss in minutes and you only end up with less money 42 03:45.990 --> 03:48.600 your trading balance. 43 03:48.600 --> 03:55.080 If the first two advice were too conservative and you may want to put your stop loss very very far 44 03:55.080 --> 03:59.760 from the entry level now, here I come with the last advice. 45 03:59.910 --> 04:04.030 Don't place an unrealistically large Stop-Loss. 46 04:04.290 --> 04:09.810 I give you this advice because at the moment you need to choose the take profit, you will have problems 47 04:09.870 --> 04:14.960 with the risk to reward ratio if you place your Stop-Loss too far. 48 04:14.970 --> 04:21.480 This may look as a contradiction of the first two but with the following example you will see that you 49 04:21.480 --> 04:24.750 can balance them and everything makes sense. 50 04:26.260 --> 04:31.920 So here we have Canadian dollar against the Japanese yen on a 1-hour chart. 51 04:32.200 --> 04:37.290 I have drawn this down trend line so the reason of the trade is quite simple. 52 04:37.330 --> 04:42.320 I want to open a short position when the price is close to the downtrend line. 53 04:42.820 --> 04:49.360 So the first time I considered a short position was here because you can see that the price hits the 54 04:49.360 --> 04:51.600 trend line and then goes back. 55 04:51.610 --> 04:59.020 So sellers were quite strong by the end of the session. But I couldn't find any good signal on the market. 56 04:59.190 --> 05:04.860 Maybe this one that is a bearish engulfing pattern or here a shooting star. 57 05:05.010 --> 05:08.030 But they are quite far from the downtrend line, 58 05:08.080 --> 05:15.940 so I missed the chance here. Another good opportunity came here with this bearish engulfing pattern that 59 05:15.940 --> 05:18.310 is very close to the downtrend line 60 05:18.490 --> 05:22.820 and, actually, I took the chance to open my short position. 61 05:23.050 --> 05:28.690 I have already drawn the entry level and stop loss lines that I took for this trade. 62 05:28.690 --> 05:30.810 So I only need to do like this 63 05:30.820 --> 05:33.160 and here we have the two lines. 64 05:33.460 --> 05:38.770 The light blue line is the entry and the red line is the stop loss. 65 05:38.860 --> 05:41.000 Let's have a look at the stop loss. 66 05:41.010 --> 05:45.720 Does it respect the three main concepts that we have seen? 67 05:45.850 --> 05:52.090 First of all, place the stop loss at a level that the price doesn't reach so easily. For the past 68 05:52.090 --> 05:53.350 price action, 69 05:53.350 --> 06:00.040 I would say that the price was in a kind of sideways trend and the top price has been reached with this 70 06:00.040 --> 06:04.270 candle, that is quite far from my Stop-Loss level. 71 06:04.270 --> 06:11.350 So definitely I would say that the stop loss is in an area that the price doesn't reach so easily. 72 06:11.350 --> 06:18.000 Then we need to check if the original trading idea will be wrong in case the price hits the stop loss. 73 06:18.010 --> 06:24.050 The idea is to trade according to the current trend that is expressed by this trend line. 74 06:24.070 --> 06:30.470 So if the price breaks the trend line of course my idea wouldn't be valid anymore. 75 06:30.500 --> 06:37.360 Now, I don't place the stop loss right after the trend line because remember that the trend line, despite 76 06:37.450 --> 06:46.330 the name line, it is an area, so I can expect that the price goes a few pips higher than this line. 77 06:46.360 --> 06:53.350 Let's check last advice that I have given to you: is this stop loss unrealistically too far from 78 06:53.350 --> 06:55.040 the entry level. 79 06:55.090 --> 06:56.220 Of course not. 80 06:56.260 --> 07:03.370 The stop loss is 50 pips far from the entry level and for this trade I'm aiming for at least 50 pips 81 07:03.370 --> 07:04.410 of profit. 82 07:04.420 --> 07:11.950 But actually I remember that I placed a take profit of 100 pips, getting a risk to reward ratio of one 83 07:11.950 --> 07:13.580 to two. 84 07:14.680 --> 07:21.130 Ok, so everything should be clear about the stop loss but we also need to have a look at how to place 85 07:21.130 --> 07:28.300 the best take profit for our trades. In the first course, we have talked a lot about money management and 86 07:28.300 --> 07:29.950 risk to reward. 87 07:29.950 --> 07:37.120 We have also seen some examples with a risk to reward ratio of 1:1 that may be fine for some 88 07:37.120 --> 07:44.860 strategies. But you know that I don't like anything that goes below a 1:2 risk to reward and I strongly 89 07:44.860 --> 07:51.000 recommend to choose a risk to reward ratio of 1 to 2 or higher for your trades. 90 07:51.430 --> 07:58.330 Having said that, every single trade should be analyzed on its own because you will never find the exact 91 07:58.330 --> 08:02.020 same situation on the market for two different trades. 92 08:02.290 --> 08:08.770 But I can give you a simple two steps guideline to help you to choose the best take profit for every 93 08:08.770 --> 08:10.480 single trade. 94 08:10.570 --> 08:13.480 First step: place a take profit 95 08:13.480 --> 08:18.620 that is twice your stop loss in order to have a risk to reward of 1:2. 96 08:19.090 --> 08:20.370 Second step: 97 08:20.610 --> 08:22.580 analyze if it is correct, 98 08:22.600 --> 08:26.080 if it is too far or too close. 99 08:26.480 --> 08:31.480 This second step needs further explanations so I'm going to open again 100 08:31.480 --> 08:34.170 the previous chart on the meta trader. 101 08:35.020 --> 08:39.210 The first thing I'm going to do is to draw my take profit line. 102 08:39.430 --> 08:41.800 So my stop loss is 50 pips. 103 08:41.800 --> 08:50.170 My take profit will be 100 pips for now. I want to change the value and I also want to change the colour 104 08:50.200 --> 08:52.230 because this is my take profit line, 105 08:52.240 --> 08:55.630 so I want a green color. Ok, 106 08:55.660 --> 08:59.710 I need to analyze if this take profit is correct, 107 08:59.710 --> 09:06.970 if it is too far or too close. This can also be expressed by three questions. 108 09:06.970 --> 09:10.050 Is my take profit at a good level? 109 09:10.390 --> 09:16.900 Is my take profit at an unrealistic level that the price will not reach so easily? 110 09:16.900 --> 09:22.730 Am I missing a chance to get more pips and so a better take profit? 111 09:22.930 --> 09:30.410 Let's check if this take profit is correct analyzing the past action of the price. Every time that the 112 09:30.410 --> 09:37.020 price went down from the down trend line, the price went down by 80, 90 pips. 113 09:37.080 --> 09:43.970 Also I need to consider that since the downtrend has started, the currency pair has already lost almost 114 09:43.970 --> 09:45.980 200 pips. 115 09:45.980 --> 09:51.020 So is a 100 pips take profit reasonable? 116 09:51.050 --> 09:58.760 Of course it is. Usually the price goes down by 80-90 pips from the down trend line and there are signals 117 09:58.820 --> 10:02.680 that are telling me that the downtrend is likely to continue. 118 10:03.020 --> 10:05.780 So 100 pips is acceptable 119 10:05.800 --> 10:10.920 as a take profit. What if the take profit was too far? 120 10:11.180 --> 10:13.850 In this case you can only do two things. 121 10:14.060 --> 10:20.220 You can decide to lower your take profit or you can decide not to open the trade at all. 122 10:20.540 --> 10:24.580 In these situations I always opt for the second solution, 123 10:24.680 --> 10:30.980 but if you still want to open the trade, make sure not to go below a one to one risk to reward ratio at 124 10:30.980 --> 10:36.170 least. If the trade is not giving you a good risk to reward ratio, 125 10:36.200 --> 10:38.520 it is not worth taking. 126 10:38.840 --> 10:42.120 What if the take profit was too close? 127 10:42.260 --> 10:48.050 If you have analyzed the market and have seen that a take profit that is twice your stop loss still 128 10:48.050 --> 10:49.760 seems to close, 129 10:49.820 --> 10:57.020 then you have the chance to increase the take profit and have an even better risk to reward ratio. For 130 10:57.020 --> 10:57.770 this trade, 131 10:57.770 --> 11:04.220 I can't realistically increase my take profit because I have seen that usually the down movements from 132 11:04.220 --> 11:10.960 the trend lines are about 80-90 pips and I already have a take profit of 100 pips. 133 11:11.060 --> 11:13.690 So it's not realistic to increase my take 134 11:13.690 --> 11:15.570 profits in this scenario. 135 11:16.130 --> 11:21.930 I consider this lecture one of the most important lecture of the entire course, 136 11:22.160 --> 11:28.000 so if you still have some doubts, please ask questions in the discussion board. 137 11:28.010 --> 11:34.260 You can also post your trade and have a second opinion from me or from other students.