How to Figure Out The Right Time to Move Your Stop-Loss to Breakeven

When is the right time?

The question of when to move your stop-loss to breakeven can be a tricky one to answer.

Move your stop too soon and you will miss out on the profits you worked so hard for. Move your stop too late, you could lose money unnecessarily.

There are a lot of opinions out there on when you should move your stop. Some say that you should never move your stop. Others say that there are a lot of gray areas.

I agree with the latter.

In this post, I'll help you understand when you should move your stop and when to leave it. Remember that the best solution will be different for everyone, so you need to understand what works for you.

I'll also show you a couple of things that can make it easier to figure it out.

Let's do this…

Benefits of Moving Your Stop-Loss

When you move your stop-loss to breakeven, you do more than ensure that you won't take a loss on the trade. You also free up your mental capital to find another opportunity.

It feels good to know that you have the potential to make money, with no risk. If you have several trades like that, it can feel really good.

You also protect yourself from crazy central bank policy changes like this. So when utilized correctly, moving your stop can be a great thing.

Waking up to that is no fun. But a properly placed stop can save your ass.

But of course, there is a trade off to moving your stop…

The Dangers of Moving Your Stop-Loss

The downside of moving your stop too soon is that your stop will probably get hit, then price can move in your favor. Has that ever happened to you?

Of course not 🙂

The reality is that it has happened to all of us.

…and at one point or another, we have all felt that the market “knew” that we moved our stop. That is ridiculous, of course, but if you are trading for long enough, it will seem like it, once in awhile.

More importantly however, when you get stopped out too soon, you are cutting some of your winners short and they won't make up for your losers.

So how do you find the balance?

Before we get into that, let's take a look at the mechanics of moving your stop.

What are the Different Types of Trailing Stop-Losses?

When you move your stop to breakeven, you are basically trailing your stop.

There are two types of trailing stop-losses. Let's take a look at each, so you understand your options.

Automatic Trailing Stop

The first one, that most people think about when you mention a trailing stop, is an automatic trailing stop.

This is when you set a stop X pips away from your entry. Then your trading platform automatically moves your stop, as price moves in your favor.

I'm sure that there are some people who use this type of stop effectively.

But I have never actually met any of them.

So in general, I don't recommend this type of stop.

The reason is that you are not in control. Which brings us to the second type of trailing stop…

Manual Trailing Stop

Instead of letting your trading platform determine your stop, I believe that it is much more useful to trail the stop yourself. You stay in control and don't get stopped out by random movements.

But the question still remains, how do you find the balance between moving the stop too soon and protecting yourself from loss?

How to Find Out What is Best For You

You might not like this.

But the “secret” is to do a lot of testing. Yes, this means that you actually have to do work. You have to do both forward testing and backtesting.

A lot of well-meaning people on the internet will tell you that you should do this, that, or the other. But in reality, you need to find out what works for you.

Moving your stop to breakeven depends a lot on your trading psychology and your entry/exit methods. Can you take a little heat, or do you need a little more certainty?

Here are a few things to consider…

The Most Common Mistake

Just like the ocean, markets have an ebb and flow. So it is best not to move your stop too soon.

Otherwise, you are just shooting yourself in the foot. Here is a common scenario, especially for beginners…

You enter a trade and the trade is profitable right away. Since you lost your last three trades, you decide to make sure that you don't lose this trade too.

So you think you are doing the right thing and you move to breakeven. Time to party!

As soon as you open a beer…you get stopped out.

Then the trade goes 500 pips in your direction.

Doh!

This leads to second guessing yourself even more, which will affect your confidence on future trades.

No bueno.

Here's a better solution…

Have a Significant Target Before Moving Your Stop

In my experience, it only makes sense to move your stop, once you have a lot of room to do so. Then at this point, you don't want to lose money because of a surprise news event or something.

“A lot of room” will be different things to different traders, so I'm not going to give you a hard and fast rule. For some, it may be 50 pips. It other cases, 300 pips might be the right time to make the move.

It all comes down to trying different strategies…

Test Different Levels

You may choose to move your stop once you have a set number of pips profit. Another way to do it is to move it if you reach your first profit target, like I usually do.

Some traders trail their stop on the low/high of the last three candles. Or maybe to the last support/resistance point.

It doesn't always have to be a move to breakeven.

Remember, in testing there are no wrong answers. Since you are not using real money, test everything and anything.

The data will tell you how to move forward.

What Happens in Testing, May Stay in Testing

There is one important thing to note about testing however. Since you are not risking real money in testing, the psychology may not be the same.

So even if you find something that works for you in testing, you shouldn't go balls out in live trading. Trade smaller positions, until you are comfortable that your strategy will work for you.

If it doesn't work, then try another idea. Don't give up!

Why You May Want More Than Breakeven

Before I go…let's talk about this whole idea of breakeven.

In reality, it is usually anything but.

If you do set your stop to breakeven, you will usually lose a little. This is because slippage and rollover will take it's cut.

So why be a net loser? Why not set your stop at +5 pips and make a little money on your “breakeven” trades?

That is what I do and I know a few other traders who do the same thing. Yeah, it isn't a whole lot of money, but if nothing else, it can give you some confidence, knowing that you are not carrying a leaky bucket.