# Chapter 35, Part I. Why Do We Need Stop-Loss Orders? Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 28, 2013.

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1. ### Sive Morten Special Consultant to the FPA

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Think twice. If you have a properly working trading system you could take small loss on this position and already compensate it doubly with other opportunities. IF you didn’t take this small loss – you didn’t compensate it, since you can’t even think about other opportunities, or think reasonably. This is like domino effect that leads to losses in other trades due to irrational decision making under stress pressure.

As you can see using stop-loss orders is called for double service – limit your loss and reduce stress. Both of them are possible, right? Since we will start to discuss particular ways of stop placement later, here we still have to note about stop loss placement in general.

The major rule for stop loss placement is that it has to be placed at “the point of no return”.

What does that mean? It means that reaching of your stop-loss order by price means:

1. The market totally has erased your initial context and reasons for trading;

2. The market will proceed further against your position with great probability.

As you understand, there can’t exist two “no return” points. By that thought it becomes obvious that estimation of stop-loss “point of no return” comes first, while lot size and entry level comes second and dependable from stop-loss point. We will talk about it in later chapters.

Simple example is some pattern trading. Let’s say that you trade Gartley “222” Sell. Hence, you stop-loss order will be above the high of initial X-A swing. If market will reach it – it will turn invalidate the “222” pattern. If you will place stop somewhere inside the X-A swing, below its high, then it will not be “no return” point or “absolute invalidation point”, since “222” pattern still could work after deeper AB=CD retracement inside of the X-A swing.

And now let’s pass to discussion of particular ways of stop-loss placement.

P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer soon.

Note: FPA ranks are earned in the battles against scam, not in the classroom.

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Lasted edited by : Oct 9, 2016