The belief that stop losses should always be 20 pips is a common misconception among traders, especially those new to the forex market. While 20 pips can work well in certain market conditions or strategies, it is not a one-size-fits-all approach. In reality, the optimal stop loss should be based on factors such as market volatility, the specific trading strategy being used, and the timeframe of the trade — not a fixed number of pips.

The idea that stop losses should always be 20 pips overlooks the fact that each trade, asset, and market condition requires a tailored approach to risk management.

Why Traders Might Prefer 20 Pips as a Stop Loss

Several reasons explain why traders might default to using 20 pips for stop loss placement:

• Simplicity: 20 pips is a round number that’s easy to remember and apply across different trades.
• Popular in certain strategies: For scalpers and day traders, 20 pips can be an appropriate stop loss for short-term moves in highly liquid pairs.
• Risk control: Traders often use 20 pips to limit losses while still giving the trade enough room to work, especially on smaller timeframes.

While 20 pips can work well for some, it doesn’t account for all market conditions or trading styles.

Why 20 Pips Is Not Always the Right Stop Loss

The assumption that 20 pips should always be used for stop losses can be problematic for several reasons:

• Market volatility: Forex pairs with high volatility (e.g., GBP/JPY, EUR/USD during major news events) may require wider stops to account for larger price swings. Using a fixed 20-pip stop could result in being stopped out too early.
• Timeframe dependency: A 20-pip stop might be reasonable on a 5-minute chart but far too tight on a daily chart. Longer-term trades require larger stops to accommodate the natural fluctuations in price over longer periods.
• Market context: Price action and technical analysis should guide stop loss placement. For example, a swing trade might require placing the stop below the recent swing low or above a key resistance level, which could be much wider than 20 pips.
• Risk-to-reward ratio: Fixed stop losses may not align with a trade’s optimal risk-to-reward ratio. Some setups may require larger stops to allow a higher reward potential, while others might only need a smaller stop.

Thus, using 20 pips as a default can lead to either unnecessary stop-outs or improper risk management.

How to Determine the Ideal Stop Loss

Instead of sticking to a rigid 20-pip stop, consider these factors to determine the most effective stop loss for each trade:

• Volatility of the asset: For highly volatile pairs or during periods of economic news, wider stops may be necessary to prevent being stopped out due to normal price fluctuations.
• Timeframe of the trade: On short timeframes (e.g., scalping or day trading), tighter stops like 10–20 pips might be appropriate. For longer-term trades (swing or position trading), wider stops (50 pips or more) are often required.
• Market structure: Place stops based on recent swing highs or lows, support or resistance levels, or key technical indicators. For example, a stop might be placed just beyond a key level of support in an uptrend or resistance in a downtrend.
• Risk-to-reward ratio: A stop loss should align with your desired risk-to-reward ratio. For example, if your target is 60 pips, a 20-pip stop might be reasonable for a 3:1 risk-to-reward ratio, but if your target is 150 pips, you may need a wider stop.
• Account size and risk tolerance: Ensure that the stop loss allows you to risk a small, calculated percentage of your account balance. For smaller accounts, tighter stops are often necessary, but for larger accounts, you can afford slightly wider stops while maintaining appropriate risk management.

Examples of Flexible Stop Losses

• Scalping: A scalper trading on a 1-minute chart might use a 10-20 pip stop to capture small price movements, adjusting based on market conditions.
• Swing trading: A trader entering a long position might place a stop loss just below the recent swing low, which could be 30–50 pips or more, depending on the asset.
• Trend following: A trader following a strong trend on a daily chart may set a stop loss below a major support level or moving average, which could be several hundred pips for larger pairs like EUR/USD or GBP/USD.

Each scenario requires adjusting the stop loss based on the strategy, asset, and market conditions, rather than relying on a fixed number like 20 pips.

Conclusion

It is completely false to believe that stop losses should always be 20 pips. While 20 pips can be appropriate in certain trading situations, such as scalping or short-term trades, it is not a one-size-fits-all solution. The most effective stop loss is one that takes into account factors like volatility, market structure, trading timeframe, and your overall risk management strategy.

To learn how to determine the ideal stop loss for different trading strategies and market conditions, enrol in our expertly designed Trading Courses today.