In my experience as a trader, I’ve come to understand that the management of risk is one of the key aspects of success in trading. To fight this, one of the primary tools that I have in my possession is the stop loss which keeps me from incurring loss to an extensive degree should a given trade go against my expectations. However, understanding when to shift my stop loss to break even, meaning I will not lose any money on the trade, is another strategy that I utilize to shield myself from risks and also help to optimize the profits.
In this article, I will focus on exactly how I make that decision and why I believe it is appropriate to move a stop loss to break even, and the advantages and disadvantages of undertaking such a measure.
Our list of top 10 recommended forex brokers:
What Does Moving a Stop Loss to Break Even Mean?
‘Moving a stop loss order to break even’ is essentially what it sounds like, the words that signify a move in stop loss towards the original ‘entry point’. This occurs when I am no longer suffering an unrecoverable loss. Suppose that I bought a stock at 50 and I placed an initial stop loss at 45 in order to avoid huge losses. Now if I shift the stop to break even it would be 45 to 50. Why is that? Because of the stop loss of 50 tails the entry price.
Say for example that the price revisions itself and goes back to $50, at this point, I would take the trade-off with no units lost. Although this may sound like a precaution, there is a key element which is the timing of when to do this. Push the stop too early and I will be taken out way too incorrectly and this will appall a winning trade and thus more profit.
Want to trade with a regulated broker? Open a free account with AtoZ Markets approved forex brokers:
Why Moving a Stop Loss to Break Even Can Be Smart
There are several reasons I like to move my stop loss to break even after a certain point of the market movement in the trade favoring me:
1. Eliminating Risk
Moving the stop to break even lets me take out risk from the trades to begin with. When the stop is at the entry price, I do not have to worry about making a loss on that trade anymore. This gives me a sense of comfort and allows me to pursue other prospects with ease.
2. Locking in Gains
Let us say I am in the trade and it moves in my favor to a point I am comfortable with, I know I can at least make a break even. It means that even if the market turns against me, I will not be losing the amount of money that I put into the trade. This is such a big relief knowing that I will not be coming out of the trade with any losses.
3. Better Trade Management
What this does is make me more effective in handling the various trades I have in the day. I am able to cut out the emotional and mental fatigue that I would be using to protect my stop loss order. I am able to her the trade progress as it should for good without the fear of making the wrong losses. It’s a way of managing a bigger number of trades for example when I have open more than one trade at any given time.
Key Factors I Consider Before Moving the Stop Loss to Be at Breakeven
Through my experience in trading, I’ve come to learn that no one rule can be put in place with regard to the break even level of the stop loss. This is the more nuanced consideration and I evaluate it differently for each trade:
1. Profit Level: How Much Cushion Do I Have?
One of the most important factors I take into account is how much in profits the given trade has earned. Letting the stop move too early can encourage unnecessary risk of having it taken out through a standard movement in the market. I generally don’t move the stop to break even till a reasonable profit objective has been reached.
Personally, that profit level for me falls within the ranges of at least {$}1: {$}1 or {$}2: {$}1 risk-reward ratio. For example, basing on my example again, if I am risking $100, I will want to see at least 100-200 which is unlimited up before I consider moving the stop. This provides the trade sufficient headspace, and in instances when the market retraces, the break-even stop loss is less likely to be hit.
2. Market Conditions: Is the Market Volatile or Stable?
Market conditions affect my decision making greatly. In periods of a volatile market, there is swift and unexpected movement of prices, thus the chances of getting stopped out are early are even greater. In volatile instances in the market, I tend to decide against moving my stop loss till I have more assurance that the pivot in the prices will hold.
However, in a less volatile scenario where there is a well-defined market trend, I find it easy to shift the stop loss order to an earlier position. Due to fewer price pullbacks during trending moves, I’m also in a position to keep the gains put without any premature exits.
3. Support and Resistance Levels: What’s the Market Structure?
I pay a lot of attention to how the market is behaving especially the important support and resistance levels looking at the changes in the stop loss. Such levels are critical as they cut across the psychological aspects of the market. For instance, if a trader is to move their stop loss to break even before the price reaches the resistance point, odds are they could get hit only to see the market in their favour after a small retracement.
Knowing this, I wait for price to clear those important levels. I am more confident in the trend after a significant resistance is touched and so I move stop loss to breakeven.
4. Time Frame: What’s My Trading Style?
The time frame of my trade also affects how quickly I adjust the stop loss. When adapting the position as a day trader, which is short in nature, I tend to use a stop loss quickly because I had intent of making quick short most of the time. This means that I follow the general rule of break even stop loss on the trade if a low level has been achieved.
However, as a swing trader or a positional trader with long-term positions, I would normally be in a position for a little longer and at the most probably move the stop lower. These trades are often aimed at bigger moves in the markets and I intend to give them room to grow. Examples such as these how ever make moving the stop too soon in such cases detrimental to the potential of the trade.
5. Market Volatility: Is the Market Volatile or Stable?
Well, this is where high volatility becomes quite agonizing. If I am in a trade where the price is volatile and indecisive, there is too great a chance that even a small stop may cause me to be stopped out too soon. Two days following into such conditions, I use to let the trade develop more and only then move stop to break even.
When I Usually Move My Stop Loss to Break Even
So due to these reasons, here’s when I generally move my stop loss to break even:
1. Hitting A Set Profit Target
In the case where the profit target has been met, I put a stop to the loss at the undercut level. This way I can lock in the profit gained and at the same time remain in the position. I usually set my profit targets at about 1.5% or 2% of the risk that was taken at the entry.
2. Stopping the Market After an Upward Breakout
The price breaks above a significant level which was previously acting as resistance or below support and starts to move in my direction. At this point, I am comfortable shifting the stop higher to break even. Once a strong breakout occurs, the trend tends to have a lot of strength which lowers the chances of retracement.
3. Prior to Major News Events
In scenario where a significant news event seems to happen, I always shift my stop loss to breakeven. I hope this is never the case, but I would rather wait a bit to do buy stops just in case the news is PRETTY eventful and the market reverses drastically.
4. When a Strong Trend Finally Appears
At this moment, my stop is moved to breakeven. I feel that there is now a strong and increasing likelihood that the trend will be in my favor and why not get out without losses if this does not come true.
Mistakes I’ve Made When Moving a Stop Loss to Break Even
With experience, I’ve encountered some of these mistakes such that I was able to draw lessons from them. For these reasons and others, these are some comforts that I have learnt to avoid:
- Placing the Stop and Moving It Too Soon There have been instances in the past when I judged it well to move my stop loss to breakeven too soon and I got stopped out with insignificant retracement only to later see the market move to my sell target. These days, I tell myself to develop more control and market timing.
- Not Giving Weight to Market Structure I used to move my stop loss without considering most of support and resistance zones. This however resulted in a sequence of getting stopped out narrowly before price bounced really well. At the moment, I am waiting for the price to go above a certain level before a stop is adjusted.
- Capping the Trade’s Makings There have been times when I just wanted to make sure, and I was too fast to move the stop which limited what the trade was able to make. These days, I allow the trade more leeway to grow, more so in an uptrend.
Conclusion
It is advantageous to move a stop loss to the break-even level as it is an effective way of managing risk, albeit a rather delicate procedure. To this end, I analyze aspects such as levels of potential profit, conditions on the market, key levels and time frame of the trade such that I know when to place that stop to break even.
I see how moving the stop might guard me from losses and even bank some profits, but what I have come to appreciate is being patient. Standstill hunting for the optimal circumstances makes the most of the profits, yet is still effective in controlling the risks.