Stop Losses & Position Sizing

You should never determine your stop loss as a minimum you can afford. For example, if you want to risk no more than $20 per trade, but the minimum position size your broker will allow is $1 per pip, then that is a very bad reason to use a 20 pip stop loss and a fixed lot size of $1 per pip! You should either find another broker, or increase the size of your account if you have sufficient risk capital, or find a Forex trading strategy that commonly uses 20 pips stop losses, if you are comfortable with it. 

However, it is very legitimate to determine your stop losses by a measure of averaged volatility, and in trend trading especially this in itself can be a very powerful money management strategy. For example, using a multiple of the 20 day average true range to determine the stop, and then basing the position size as a percentage of current account equity, is a very common money management component within Forex trend trading strategies. 

Even if you base your stop losses on technical levels, it can still be worth using a volatility measure in your position sizing. For example, if the 20 day average true range is double a very long-term average true range, you might risk half of a benchmark risk per pip related to your account equity. Read more ...