Capital Preservation & The Break Even Stop Loss

by Stephan Smith on April 30, 2011

When it comes to currency trading, all traders hope to turn out a profit from every trade. In an attempt to do so, traders commonly place their stop losses at great distances from their point of entry, which can be anywhere from 20, 50, 100 or even 250+ pips.

A common reason why a currency trader would put one’s stop loss so far away from their entry point is so that one can withstand the frequent fluctuations of the market. It is very common for a trade to move against a trader’s position immediately after entering a trade, especially when you factor in broker costs, also known as the spread. Because of that fact, traders feel it is appropriate to have stop losses as far away as the moon.

After all the price moves and fluctuations the ultimate hope of a trader is for the price action of the currency pair being traded to eventually move in the trader’s direction without hitting one’s stop loss. Unfortunately, many traders don’t experience profitable trades most of the time and stop losses are all to frequently getting hit, resulting in losses. A few high leveraged loses can do some major damage to an account balance.

To prevent loss, in my opinion it is absolutely necessary to move your stop loss to break even when a trade goes in your direction a reasonable amount. As to what that reasonable amount is would depend on what you deem reasonable. I personally feel that if a trade moves 50 to 100 pips in my direction, it would be a good time to move my stop loss to break even.

Some other factors that I consider when planning to move my stop loss to break even is to keep in mind the overall volatility of the currency pair being trading. If the currency pair has a high level of volatility, then I may postpone moving my stop loss until price action moves 80 to 150 pips in my favor. That or wait until price moves beyond its normal volatile price swings…whichever requires less pips.

Moving my stop loss to break even is a big deal for me. Not to do so would go against my two fundamental rules: Do not lose pips and do not lose pips. Those two rules require repeating. Do not lose pips and DO NOT LOSE PIPS. To accomplish that, I see it acceptable to change my stop loss to break even as soon as possible while remaining reasonable.

I don’t change my stop loss to break even when a trade moves 5 pips in my direction because I am a long term trader. Because I am a longer term trader, it doesn’t seem reasonable to change my stop loss to break even at 5 pips profit. Check out my article titled ‘5 Reasons Why I Prefer Long Term Forex Trading‘ to learn why I like long term currency trading more than short term.

However, there have been cases where I have changed my stop loss to break even when a trade went just 20 pips in favor. It is up to you to weigh in all the factors and make reasonable and sound decisions regarding when to move your stop loss to break even. I truly believe that a currency trader’s highest mandate should be capital preservation. Remember these wise words…

“It is better to lose profit than to lose principle. It is better to lose 100 pips of profit than to lose 1 pip of principle.”

-Stephan Smith, StephanSmithFX.com

So I will use my stop loss to break even in all my trades as soon as I deem it appropriate. In doing so, I comply with my capital preservation mandate.

The Currency Trader’s Mandate Applies to All Trading Styles

If you scalp the currency market in an attempt to profit 5 -15 pips before you exit a trade, then waiting for price to move 50 pips before you move your stop loss to break even may not make sense. So I suggest you adjust the break even strategy. Instead of waiting until price moves 50 pips in your favor, wait until price moves 3 -10 pips in your favor before moving you stop loss to break even.

No matter what your Forex trading strategy is, I highly recommend that every Forex trader makes capital preservation one’s primary and highest mandate. One of the best ways to comply with the capital preservation mandate is to move your stop loss to break even as soon as possible and while being reasonable…period.



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{ 4 comments… read them below or add one }

mikerosss May 22, 2011 at 8:40 PM

My partner and I really enjoyed reading this blog post, I was just itching to know do you trade featured posts? I am always trying to find someone to make trades with and merely thought I would ask.

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Stephan Smith May 22, 2011 at 9:30 PM

Hi there Mike.

I’m happy to learn that you and your partner enjoyed this post and I do appreciate you taking the time to let me know.

Regarding your question, I don’t trade posts/content with others. If you would like to post some of the videos I’ve created on your website, I recommend that you check out my YouTube Channel. Those videos can be embedded on any website. I hope that helps.

Do not hesitate to contact me again if you have any other questions. Talk to you later.

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Mike Ross May 3, 2011 at 7:25 PM

Keep posting stuff like this i really like it.

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Stephan Smith May 4, 2011 at 8:45 AM

Hi Mike,

Thanks for the kind words.

I’m glad you decided to visit my site. Come back soon.

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