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The Best Time to Move Your Stop Loss to Breakeven

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The short answer is, never – there is never a good time to move your stop loss to breakeven. Better yet, it is never logical nor strategic to move your stop loss to breakeven.

Of course, I realize that “never” doesn’t make for a very informative lesson. Therefore I have decided to expand on that idea with some basic principles as well as an example from a recent trade I took.

In this lesson, you will learn why it never makes sense to move your stop loss to breakeven. We will discuss the implications of doing so and finish off with a better, more strategic approach to managing risk as a Forex trader.

A Flawed Stop Loss Strategy

Everywhere you turn in the Forex market there seems to be talk of moving stop losses to breakeven. It’s one of the more commonly discussed topics and arguably the most misunderstood in the world of trading.

The problem begins to surface when we look at why something is done. Why do most traders move to breakeven? Most who engage in the practice will argue that they do it to protect their capital, which by itself is a great reason to do anything as a trader.

But that doesn’t really answer the question. There are many ways to protect your trading capital. For example, remaining patient and taking only the very best setups will help protect your capital.

So again, why move your stop loss to breakeven? The real answer…

To prevent a loss, of course. It isn’t necessarily about protecting your capital, it’s about protecting your ego. Some may argue that point and your very own ego will try to displace it, but having traded several different markets since 2002 I can tell you that it’s a fact.

The option exists to move a stop loss 10 pips above or 10 pips below an entry price, yet traders still choose to move it to their exact entry price. This fact alone proves that for most traders, the motive to protect the ego from a loss is greater than it is to protect their trading capital.

The Market Doesn't Care About You or Your Stop

The whole premise of a stop loss is to get you out of a trade should the market invalidate the setup. This typically involves breaching a key high or low that you have designated as being critically important to the trade setup.

A stop loss placed at your entry price does none of that. Sure, it protects your capital, but a breakeven stop that is triggered does not invalidate the setup because the market doesn’t know where you entered, nor does it care.

Price action trading works because market participants from around the world see the same formation in real-time. A bull flag pattern typically breaks to the upside because enough traders see the same pattern and know that it means higher prices are likely on a break of resistance; also referred to as herd mentality.

You are the only person on earth who knows where you entered a trade. So when you move your stop loss to breakeven you are modifying your parameters based on a level that is specific to you rather than one that is universally important.

A Better Way to Manage Risk

Rather than moving your stop to an arbitrary level, you should always aim to move it to a strategic level – one that the market has deemed important.

In fact, everything you do as a trader needs to be strategic. Everything from your entry to your stop loss to your take profit level; it all needs to be strategic and never arbitrary.

Let’s take a recent trade of mine as an example. The GBPUSD daily chart below illustrates the setup.

GBPUSD bullish pin bar on the daily chart

As you can see from the chart above, GBPUSD formed a bullish pin bar after a daily close above a key horizontal level. Based on the structure of the setup, a buy order on a retest of the level as new support looked favorable.

Here is how the initial trade looked.

GBPUSD pin bar long entry

The chart above shows the long entry on a retest of the level as new support. Note that the stop loss was placed under the low of the bullish pin bar while the target was set at recent highs. This gave us a setup worth a potential 310 pips with a 90 pip risk (3.4R).

Now here comes the kicker. By the second day, the market had moved nearly 50 pips in our favor. Most Forex traders staring at 50 pips of profit instinctively want to move their stop loss to breakeven to “lock in profits”. And I’m sure some did on this particular setup.

However as I mentioned previously, a breakeven stop loss is more about protecting the ego from a loss than it is about strategically locking in profits.

Here is what happened to those who were quick to move to breakeven.

GBPUSD breakeven stop loss on long setup

Although the market moved even higher on the third day, those who had moved their stop loss to breakeven were stopped out just before the market took off to the upside.

Does this look familiar? It was certainly a common occurrence for me when I started trading Forex back in 2007.

So what is this “better approach”, you ask?

It’s a way of trailing your stop loss at a level that has been defined by the market. In the case of the GBPUSD setup above, you would move your stop under the low of the second day.

Here is what that looks like.

GBPUSD strategic stop loss placement

Notice how in the chart above, the stop loss gets placed under the low of the second day. If the stop gets triggered here, we no longer want to be in this trade as it means the most recent low was taken out and thus further losses are likely.

The placement above also means that we were able to cut our risk in half. So if you were risking 2% of your account balance on the initial entry, by day two your risk was just 1%.

Not only that but by being strategic about the placement of your stop you were able to stay in the trade, thus netting 6.8% profit if risking 2%. Meanwhile, those trying to protect their ego from a loss came away with nothing.

Final Words

The idea of a breakeven stop loss is a flawed approach. Those who teach it like to think that it’s a sound method for risk management when in fact it only serves to protect their win rate – one of the more meaningless statistics for a trader.

Remember that once you enter a trade your entry price becomes trivial. All that matters from that point on is your target and an invalidation level, which is where the market needs to trade to invalidate the setup.

This invalidation level is the only area you should be concerned with when managing your stop loss. A strategic approach such as this will ensure that you are trading the price action on your chart rather than listening to your ego, which will get you in trouble every time.

Your Turn

Do you currently move your stop loss to breakeven? If so, do you see things a bit differently having read this lesson?

Share your experience or ask a question below. I look forward to hearing from you.

Leave a Comment:

20 comments
Connor McLeod says

I have been a successful trader for close on 15 years now. I almost always move my stops to break-even once I have reached an initial target or price has closed beyond an important level. I will also do it if price HAS NOT reached that level should there be a major news event out. There is no ego in my approach. Ego left a long, long time ago.

This article is irresponsible and downright silly for new traders to follow, in particular. Break-even stops can tick you out early, but defending your account is the first thing you need to learn, profits come second.

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    Troy says

    I will only say this. I concur with Connor’s comment 100% “This article is irresponsible and downright silly for new traders to follow!”

    Reply
    Eddy says

    This approach works just fine for me !
    Indeed I was first taught by other ” traders” to move your stop to break even when the market moved about 60 pips in your favour, which stopped me out frequently.
    I was protecting my account but also no profits were made in the process.
    By using the trailing stop method as described in the article, I give my trade more room to breathe using price action and I’m finally making money and progress. I also took this trade used in the example and it provided me with a 7R. I guess when you move your stop to break- even when an initial target has been hit your basically doing the same thing but on a bigger scale ? It has proven to work for me so I’m sticking with it.

    Reply
    Justin Bennett says

    Hi Connor,

    Thanks for your comment. If you have followed my site for any length of time, I’m sure you have heard me say that protecting your capital is your number one priority, making money always comes second. This is a belief I put into practice each and every day, as all of my members can surely attest to.

    I have never claimed that a trader should not move a stop loss once a trade begins moving in their favor. I trail my stops all the time, especially on trades where I pyramid.

    Your entry in the market is completely irrelevant in terms of whether a setup will be profitable or not. As a successful trader of 15 years I’m sure you know this. Therefore it makes no sense to place your stop loss, an automatic trigger that indicates a setup has been invalidated, at a level that is completely irrelevant to the viability of the setup.

    Furthermore, you must also be aware of the fact that there is no one “right” way to make money in the markets. So I suppose we will have to agree to disagree. It sounds like we both have an approach to risk management that is safe and effective; yours works for you and mine works for me. That’s what being a successful trader is all about – finding what works best for you.

    Have a great weekend!

    Cheers,

    Justin

    Reply
    elnibs says

    I tend to agree with Justin on this one. I think Connor missed the point as he said clearly “once I have reached an initial target”, so basically Connor is agreeing with Justin without knowing, as the initial target with Justin has NOT been reached yet, but the trade is going in his favor, he is risking less. If I understood correctly what Connor is saying is moving to break even when the pair reaches for example the level that the red MA is finally at which is clearly a resistance area, while Justin’s approach is gradual.

    Reply
    S says

    +1
    And in his particular example. The flaw is not getting stopped out at break even. Instead since the setup is still valid, the flaw would be not getting back into the trade which would have been a winner.

    Reply
Fathin Muhammad Mustafa says

My husband likes to put his S/L at break even after a certain amount of pips, and when he sees me trading, he always recommend to put my S/L on break even. I actually never want to do that, but because he makes me scared, saying:”you’re gonna ruin your account” i listen eventually. I wished I never listened to him :-D. So far, I missed a lot of good trades just because I listened to him.

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Hugh Kimura says

I don’t think that there is a right or wrong answer when it comes to moving stops to breakeven.

Only what works for you and makes money.

As I see it, there are two possible reasons for moving a stop to BE…

1. You are moving your stop because you are nervous about protecting your 10 pips of profit. Like you mention above.
2. You have hit a solid first profit target and you want to protect the rest of your position.

So in reason #1, yes…it doesn’t make sense to move your stop. You are only cutting your profits short.

But let’s say that you have already bagged 2R on your first profit target and you are leaving at little on the table to try to pick up a runner. I believe that it makes a lot of sense to move the stop to breakeven or even slightly in the positive, when it makes sense.

Doing this often frees up a lot of mental capital that can be used on other trades. It really depends on your personality.

Cheers,
Hugh

Reply
    Justin Bennett says

    Hugh, I agree that it needs to fit an individual style, which is something I’ve preached about since starting this site. However, I stand by the idea that moving a stop loss to breakeven is a bit silly when you stop (no pun intended) and think about it.

    The market doesn’t know where you entered nor does it care. So, in essence, when you move to breakeven you’re making an emotional decision rather than a logical one based on the technicals. And as the saying goes, how you do anything is how you do everything.

    Trailing a stop loss when the market begins moving in your favor is preferred; I do it all the time. But moving it to a level that only you know about makes little sense when everything else we do as technicians revolves around key levels.

    To each his own I suppose. Thanks for the comment.

    Reply
Pawel says

I think there some misunderstanding in the discussion.
Justin point is that
a) you should be trailing stop losses, but rather to levels dictated by structure (e.g. new candles low). The entry point is usually not a structure
b) you should be willing to give the trade some room and time to play out, if you are targeting high RR, because markets are choppy and maybe coming back to test / retest entry area, before finally taking off

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Pedro says

Hi, Justin.

Let me congratulate you for your excellent work and material. I’ve read some of your articles, and I was wondering what Moving Averages do you use for confluence, they seem to be one EMA of 10 periods and other EMA of 20 periods, is this true?

Thank you for your answer,
Pedro

Reply
    Justin Bennett says

    Pedro, thanks. Glad you enjoyed the post. Yes, I use the 10 and 20 EMAs.

    Reply
Armando says

I agree one million percent with Connor. It all comes down to scarcity mentality and greed vs abundance and capital preservation. This article has flawed logic when it says that some traders move the stop to breakeven to protect profits, this doesnt make any sense if break even is a point where you BREAK EVEN, no profits no loss so how could moving a point to break even protects profits???? If your trading is precise and if you have an abundance mentality that opportunities come all the time, and if you are not greedy about every so often loosing potential profit in order to protect your capital, then you will move your stop to BE as soon as posssible and never look back. Happy trading.

Reply
    d says

    Wrong. No. Wrong. “Scarcity mentality” is a dog whistle word used by internet marketers and “success gurus” and you’re buying into it it merely because it makes sense to you, which is terrible reasoning.

    Reply
Godwin says

HI JUSTIN
Thank you very much for this great article. It has been very helpful. You have clearly differentiated trailing stops from moving stops to break even and i think i agree with you on the fact that it is better to trail your stops than to move your stops to break even. Keep up with your incredible work.

Thank you.
Godwin.

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Danielle Witter says

Something which can help and is somewhat in the middle is partially closing a position for your initial non negotiable pips and letting the rest run on a slightly smaller lot – leaving your SL where it is until you can move it to a strategic place. I think trailing stops might possibly be more common trading lower timeframes in strategies where you get a smaller amount of pips and the rest is a bonus.

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Philip says

Wao! This is eye opening

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Steven Rogers says

I think there is misunderstanding here. Moving a stop to break even (entry point) versus making your PROFIT TARGET the new breakeven. I don’t think anyone sound really disagree with essentially moving your stop to your profit target one reached rather than just close the trade. That way you’ve locked in PLANNED Target and you still leave the “runner” to make more 😀

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D says

Almost everything about this article is wrong.

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    Justin Bennett says

    To each their own, especially when trading. Do you have any thoughts on the matter, though?

    Reply
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