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A less on how traders determine their initial stop levels when trading the stock, futures, and forex markets.

In our last lesson we looked at the difficulty of overcoming a loss in the market to further emphasize the importance of protecting your trading capital as a critical component of any successful trading strategy. In today's lesson we are going to start to look at the first and one of the best ways of protecting one's trading capital, setting your initial stop.

As we learned about in our lesson on the effects of trading losses, 50% or more of the trades made by many successful trading strategies are losers. These trading strategies and traders are successful not because they are highly accurate on a trade by trade basis, but because when they are wrong they cut their losses quickly and when they are right they let their profits run. While the trading strategy that you eventually end up trading for yourself may have a higher success rate than what I mention above, any strategy is going to have loosing trades, so the first key to staying in the game is to have a plan for managing those losses so they do not get out of control and wipe out your chances for success.

With this in mind, what most traders will start with when designing a plan for setting their initial stop loss is the amount they can afford to loose on a per trade basis without having a detrimental affect on their account. While this varies from trader to trader and from strategy to strategy, as Dr. Alexander Elder mentions in his book Trading for a Living, many studies have shown that strategies and traders who risk more than 2% of their overall trading capital on any one trade are rarely successful over the long term. From what I have seen most traders risk way more than this on an individual trade basis, another large contributor to the high failure rate among traders.

Traders who set their per trade risk level at 2% of their trading capital or less, not only put themselves in a situation where a fairly lengthy string of losses will not knock them out of the game, but also put themselves in a situation where any one trade is not going to make or break their account. This is important not only from a money management standpoint but also from a psychological standpoint in that they are not attached to any one trade and are therefore more likely to stick to their strategy.

In order to have a true understanding of what this number should be for a specific strategy you will need to know what the expected accuracy rate is for the strategy, something which will cover in later lessons. For now however it is sufficient to simply understand that you need to have a feel for how much you plan to risk on a per trade basis as a first step in designing a successful money management strategy, and that you should be very wary of any strategy which risks more than 2% of your trading capital on any one trade.

Now that we understand that determining how much to risk per trade is the first step in any successful money management strategy, we can move on to other methods of setting your initial stop which fit within the limit set by the amount a trader is willing to risk on a per trade basis.

As always if you have any questions or comments please leave them in the comments section below so we can all learn to trade together, and good luck with your trading!

1. Intro to Technical Analysis
2. Introduction to Dow Theory
3. Second 3 Tenets of Dow Theory
4. How to Read Stock Charts
5. How to Trade Support and Resistance
6. Multi Time Frame Analysis
7. Introduction to the Double Top and Double Bottom Charting Pattern
8. How to Trade Double Tops Like a Pro
9. How to Trade the Head and Shoulders Pattern Part 1
10. How to Trade the Head and Shoulders Pattern Part 2
11. How to Trade the Wedge Chart Pattern Like a Pro Part 1
12. How to Trade the Wedge Chart Pattern Like a Pro Part 2
13. How to Trade the Flag/Pennant Patterns Like a Pro Part 1
14. How to Trade the Flag/Pennant Patterns Like a Pro Part 2
15. How to Trade Triangle Chart Patterns Like a Pro Part 1
16. How to Trade Triangle Chart Patterns Like a Pro Part 2
17. Learn to Trade with Technical Indicators
18. How to Trade Moving Averages Like a Pro (Part 1)
19. How toTrade Moving Averages Like a Pro (Part 2)
20. How to Trade the MACD Indicator Like a Pro (Part 1)
21. MACD Indicator: Trade it Like a Pro (Part 2)
22. How to Trade the Relative Strength Index (RSI) Like a Pro
23. How to Trade Stochastics Like the Pro's Do
24. The Difference Between the Fast, Slow and Full Stochastic
25. How to Trade Bollinger Bands - Stocks, Futures, Forex
26. How to Trade the Average Directional Index (ADX)
27. How to Trade the Parabolic SAR
28. How to Trade Candlestick Chart Formations Part 1
29. How to Trade Spinning Tops and Doji Candlestick Patterns
30. How to Trade the Bullish/Bearish Engulfing Candlesticks
31. How to Trade the Hammer Hanging Man Candlesticks
32. How to Trade the Morning/Evening Star Candlestick Pattern
33. How to Trade the Inverted Hammer/Shooting Star Patterns
34. Why Most Traders Lose Money and The Solution
35. Why Traders Hold On to Losing Positions
36. Two Trading Mistakes Which Will Destroy Your Account
37. Herd Mentality is the Psychology That Leads to Big Trading Losses
38. Profit Expectations: What Millionaire Traders Know
39. How to Join the Minority of Traders Who Are Successful
40. How To Determine Where to Put Your Initial Stop Loss Order
41. How to Use the Average True Range (ATR) To Set Stops
42. How to Up Your Chances for Profit When Setting Stops
43. How to Reduce the Chances of Being Stopped Out on a Trade
44. How Successful Traders Use Indicators to Place Stops
45. Stop Your Mind From Causing You to Take Profits Too Soon
46. How To Use Trailing Stops
47. Why Position Sizing is So Important in Trading
48. Why Fixed Position Sizing Is Not the Best Way to Trade
49. Trading The Martingale and Anti Martingale Strategies
50. How to Set Trade Position Size for Maximum Profits
51. Maximize Trading Profits with Correct Position Sizing 2
52. Fundamental Analysis and The US Economy
53. A Simple Explanation of the US Economy for Traders
54. Simple Explanation of The US Economy For Traders Part 2
55. The Business Cycle and Fiscal Policy - What Traders Know
56. How Interest Rates Move Markets
57. What Traders Know About Interest Rates Part 2
58. What Traders Need to Know About The Structure of The Fed
59. How the Fed Changes Interest Rates
60. How to Determine When the Fed is Going to Change Rates
61. Why Markets Move Ahead of Interest Rate Announcements
62. How to Trade the GDP Number (Part 1)
63. The Components of the Gross Domestic Product (GDP)
64. Intro to Trading Non Farm Payrolls (NFP's)
65. Trading the News - Economic Numbers - Retail Sales
66. Trading the News - Economic Numbers - ISM Manufacturing
67. The Producer Price Index (PPI)
68. The Consumer Price Index (CPI)
69. Trade the News - Existing Home Sales Index
70. How To Interpret the Consumer Confidence Index (CCI)
71. How to Interpret the Index of Leading Economic Indicators
72. The Advantages and Disadvantages of Day Trading
73. The Advantages and Disadvantages of Swing Trading
74. The Advantages and Disadvantages of Position Trading
75. How to Keep a Trading Journal
76. The Most Important Attributes of a Good Trading Journal
77. The 20 Components of a Successful Trading Plan

This is a series of 77 short video lessons meant to give traders an introduction to the basics of trading as well as the components necessary to develop a profitable trading plan.