Where should we put stop loss in free risk?
In trading, the concept of "free risk" typically refers to a situation where a trader has already moved their stop loss to their entry point or beyond, effectively eliminating the risk of losing money on that particular trade. Achieving a "free risk" scenario is often seen as a desirable goal for traders because it means that even if the trade ultimately turns against them, they won't incur any financial loss.
Here's how a "free risk" stop loss placement strategy works:
Initial Stop Loss:
- When entering a trade, a trader typically sets an initial stop loss order at a level where they are willing to accept a loss if the trade goes against them. This level is determined based on the trader's risk tolerance and the market's price action.
Profit Target:
- Simultaneously with the initial stop loss, the trader also sets a profit target, which is the price level at which they aim to take profits and close the trade.
Risk Management Strategy:
- The trader monitors the trade's progress and adjusts their stop loss as the price moves in their favor. The goal is to move the stop loss to a level that eliminates the risk of losing money on the trade, hence achieving "free risk."
Trailing Stop Loss:
- One common technique to achieve free risk is to use a trailing stop loss. A trailing stop is an order that moves with the price in the direction of the trade but does not move backward if the price moves against the trade. As the trade moves in the trader's favor, the trailing stop follows the price at a specified distance.
Moving Stop Loss to Break-Even:
- Another approach is to move the stop loss to the entry point (break-even) once the trade has generated enough profit to cover the initial risk. This way, even if the trade is eventually stopped out at break-even, the trader doesn't incur any loss.
It's important to note that achieving a "free risk" scenario is not always possible, especially in volatile markets or during news events that can cause sudden price swings. While the concept of free risk is appealing, it should not be the primary focus of a trading strategy. Instead, traders should prioritize proper risk management, position sizing, and having a well-defined trading plan that considers potential losses and profit targets based on technical and fundamental analysis. A disciplined approach to risk management is essential for long-term trading success.