i. Breakeven means having no risk in the market.
ii. By moving stop loss to breakeven the trader takes risk off the table.
iii. A lot of things to consider when moving stop loss to breakeven.
What does stop loss to breakeven mean?
Before I get on to this, I just want to touch upon what stop loss is and what breakeven means.
I am sure you know that stop loss is a way to manage risk. Whenever a trader gets into a trade, they place a buy order and a stop loss order.
Stop losses helps us, traders, to protect ourselves in case the price does not go in our favor and we can get out of the situation with a minor loss.
Breakeven is a situation of no profit and no loss. When a trader gets into a trade at a particular price level and they square off the trade at the same price level, the trade is a breakeven one.
So now what does stop loss to break even mean? It simply means that once you enter a position at a price level and have your stop loss some pips away from it, you shift the stop loss to the entry price.
For instance, let’s suppose that you see a good buy opportunity on GBPUSD at say 1.2050. You place the stop loss 50 pips below at 1.2000.
You enter the trade and eventually, the price moves in your favor, i.e. to the upside. You see this as a positive sign and you shift your stop loss from 1.2000 to 1.2050.
By doing this, you ensure that you do not lose anything in the trade if at all the price goes against you at some point before you close the trade and book profits.
Why moving the stop loss to breakeven makes sense?
I am sure that you will read articles and blog posts on many trading websites that take a negative stance on moving the stop loss to breakeven.
I beg to differ. I believe that if you move your stop loss to breakeven at the right time and in the right way, then you can protect your capital from incurring unnecessary losses.
Here’s why I prefer moving the stop loss to breakeven, let’s suppose that you spot a good sell opportunity on EURUSD at say 1.1150. You place your stop loss at 1.1200, 50 pips away from the entry.
The setup that you trade usually gives you an RRR of 1:3 and in this case, your target will be at 1.1000.
After you enter the trade, the price moves in your favor and is trading at 1.1050, just 50 pips away from your target level.
You moved your stop loss from 1.1200 to your entry level at 1.1150 and you are making your trade risk-free.
Something happens and the price never reaches your target price level but it reverses, hits your new stop loss, and also goes on to hit the old stop loss.
If you wouldn’t have moved your stop loss to breakeven, you would have incurred a loss on this trade.
Now tell me, doesn’t it make sense to move stop loss to breakeven? It certainly does, to me at least.
Once you move your stop loss to the price level at which you entered, you are literally taking risk off the table and you are in safe territory.
But there is a catch here. When I say that you should move your stop loss to breakeven, it doesn’t mean that you move it at any point of time you wish to. No.
You have to look for certain things before you do this, or else you get stuck in a bad trade which was a result of a bad decision.
Read ahead to understand when exactly to move stop loss to breakeven.
When to move stop loss to breakeven?
I hope that by now you have understood the positives of moving the stop loss to breakeven.
As I said, you should not move stop loss to breakeven just any time you want to.
So, here are some situations in which you can move your stop loss to breakeven.
1. When T1 is hit
A lot of traders look to have multiple profit targets when they trade. T1 means the first profit target.
You could have targets based on RRR or other parameters. This could be one scenario where you move your stop loss to breakeven.
For instance, you entered EURUSD at say 1.2500, stop loss at 1.2450. Once the price is trading at 1.2600, you could look to book partial profits and move your stop loss to breakeven as the price is well above your entry level and you could make the trade risk-free.
2. Value area breach
Value areas are areas where price had some abrupt movement in the past and traders could expect some unusual price movement when the price reaches this area again.
There will be multiple value areas on the price charts. If you take a long trade on a breakout of one value area to the upside, there will be another value area that will be above it.
This could be the second scenario where you can look to take the risk off by moving the stop loss to breakeven.
Once price breaches a value area that could have made the price move against you, you know that the trade was a good one, you were right in your analysis, and you could move the stop loss to breakeven.
3. Impulse - correction - impulse
We know that price does not move in one direction in a straight line, it moves in phases and these phases are known as impulse and correction.
Whenever there is an impulsive move, it will always be followed by a price correction.
After the correction, the price could either have another impulse in the direction of the prior trend or it could in the opposite direction.
Suppose you took a short trade on USDCAD on a breakout and the price moved impulsively down.
It then corrected a little which was followed by a strong impulsive move to the downside.
You can move your stop loss to breakeven in such situations as you have confirmation that the trade is going exactly how you wanted it to.
When should you not move stop loss to breakeven?
The reason why you see all the traders advocate against moving the stop loss to breakeven is that they used wrong methods which resulted in them having a bad trade that could have been better.
There are some mistakes that many traders make while they look to move stop loss to breakeven and I am listing them out for you so that you do not make these same rookie mistakes as others.
1. Price too close to entry level
I have seen traders moving the stop loss to breakeven just when the price moves a little bit in their favor and they just want to rush into making the trade completely risk-free.
This is the worst thing you could probably do as you are not giving the price some room to breathe.
You need to give time to the price to move in your favor and if it doesn’t then you should just take the loss and move on.
What if you moved your stop loss too early to breakeven and price hit your stop loss and then went in your direction. Trust me, it hurts.
You should never move stop loss to breakeven if the price is too close to your entry level.
Now you could ask how close is too close and there will be no definite answer, it depends on the currency pair you are trading.
The next time you take a trade, don’t rush into moving the stop loss to breakeven but rather have a proper plan to do so.
2. Price hasn’t done anything significant yet
You cannot just enter a trade, wait for it to simply move in your preferred direction and you just move stop loss to breakeven.
Doing this will might get you away a few times but eventually, it will bite you really big.
What you should be doing is to wait for the price to do something significant and you have to act only after you listen to what the market is doing.
You could wait for the price to breach a value area that was in its path or you could wait for it to correct a little and resume the prevailing trend.
These may seem like small things but it goes a long way. Not many traders do this that’s why not many traders are successful.
3. Price retraced a little
I am sure it has happened with you that you get into a trade and straight away the price moves in your preferred direction.
You get excited about the trade and you start dreaming of becoming filthy rich from this single trade.
But then suddenly, after the impulsive move, price retraced and moved against you.
I am sure you would have got scared by this and will get the feeling that the price will just go on to hit your stop loss any time soon.
These emotions would make you move the stop loss to breakeven.
What happens next? The price just touched the entry level which is your stop loss now, kicks you out of the trade, and it bursts into your preferred direction and you could have had a successful trade within a few minutes, but only if you didn’t move the stop loss.
When you read all these things, it doesn’t make much difference but when it actually happens with you, it does not feel so good.
When things like these happen, traders just go on to blame the markets and the brokers for manipulating prices against you.
But in reality, all of this could have been avoided if you just stuck to the plan.
I hope that after reading all this, you understand the importance of having a plan and sticking to it, and most importantly you should make the right decisions only in the right situations and not just whenever you feel like it.
Moving stop loss to breakeven is not a holy grail
By now I am sure you realize that moving the stop loss to breakeven has both pros and cons.
I have already discussed the pros of moving the stop loss to breakeven but in this part, I will touch upon some of the downsides of moving the stop loss to breakeven.
Even if you follow the steps mentioned above, move stop loss to breakeven according to what I have mentioned above, there are chances of price going on to hit the stop loss and move in the direction of your trade.
Moving stop loss to breakeven is not a holy grail and neither should you ever treat it as one.
The markets are uncertain and you can never be right always. It is all about odds and how it plays out. All you can do is make the right decisions to bring the odds even more in your favor.
The best thing that you can do here is to backtest different scenarios and devise a proper plan for moving the stop loss to breakeven.
Moving stop loss to breakeven is a good thing to do and it can save you a lot of money but you have to do it in the right places and at the right time.
That’s why I always try to assert the importance of backtesting rigorously and building a proper trade plan.
By doing this, you will not win 100% of the time, but what certainly will happen that you are increasing the odds of you winning, I would take that any day, and you should too.
Do you move stop loss to breakeven?
Are you someone who likes taking risk off at the right times or do let things play out as it is and do not like interfering, do let me know.
Also, let me know what exactly your plan is to manage trades and what all changes do you make while in a trade.
Go on and share this blog post with as many people as you can and let them also think about moving the stop loss to breakeven while they trade.
Feel free to reach out through the comments section for absolutely anything and I will get back as soon as possible.