Trading Futures/Forex For Newbies...Stop Losses

Investors new to trading futures always want to use stop losses. A stop loss is an order to exit a trade in order to limit the amount of loss that a trader takes on a trade, should the trade goes against them. Stop losses are smart trading, protecting initial investments. However, too often newbie investors want to use unrealistic stops that just result in unnecssary losses.

Too often, small investors new to the game of futures trading, are afraid to take much of a loss on their trade. To compensate, they will set the stop loss so small that when the price fluctuates even a little, they get stopped out. A profit target of 10 ticks (price movements) and 2 stop losst ticks is unrealistic for trading futures.

The difference between the bid (what you can buy a futures contract for) and the ask (what you can sell a futures contract for) is 1 tick. So a 2 tick stop loss could get hit just in the fluctuation back and forth on the bid and the ask.
To be a useful stop loss, it is best to place a stop loss right under a recent minor support level (if going long) or right above a recent minor resistance level (if going short). Examples of a minor support could be a pivot or a moving average. Say the moving average for the S&P 500 Emini is at 1330.50. Then place the stop at 1330.25 for going long or 1330.75 for going short.

To determine a workable stop loss, here's an exercise you can do on a futures real time simulator to figure out just how large a stop loss you need. First, start with some unrealistic combination of profit and stop. For example, 10 tick profit and 2 tick stop. Trade the same futures contract over and over and see if you get stopped out. If that combination does not work, try 8 profit and 4 stop, or 6 profit and 6 stop. Continue to try different combinations over and over until you find a combination that will give you 85% accuracy. It may take you a few days to finally arrive at a combination that works for you because you will need to test the combination in a variety of market conditions.

Once you have determined your stop loss combination, you'll feel more comfortable pulling the trigger and entering trades. An 85% accuracy rate is high and you'll do well as a trader. Again, don't be unrealistic. 100% accuracy is very hard to achieve every day, but if you can get to 85% that is realistic.

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