 |
If you like our blog, click on the "Like" button below. Once you do, you will get FREE Instant Access to the Magic Forex Candlesticks plus the Magic Forex Divergence Trading Guides. |
How to place a stop loss order is an important part of your money management system that you develop for your trading. The market is always ebbing and flowing. It’s like the waves in an ocean. The market goes in one direction. It has a correction. Then it continues back in its trend direction. It has another correction and so on. Even in sideways or choppy market, there are ups and down in the price action. It is like the continuous ebb and flow of the tides. You must learn to ebb and flow with the tides in the market. Setting stops on the key levels of price support are crucial. These key support levels represent significant market realities occurring with enough trade volume to warrant a stop loss level.
There is a continuous ebb and flow in the market. Even in case of a perfect trend this ebb and flow is superimposed on the trend. How do you reduce the possibility of getting stopped out of a perfectly good trend by the normal ebb and flow of the market? The market will continuously fluctuate. The answer lies in the current price, volume and volatility of the market. You will need to ensure that your trading system and approach take these factors into consideration so as to allow your stops to ebb and flow with the markets. The stops need to protect you from risk but they also need to allow the market freedom to fluctuate.
The market will tell you where to set your stop loss if you know how to listen to the market. To choose a random exit that does not include the crucial information the market is giving you at any time is ignoring what the market is telling you. Never ever use an arbitrary dollar amount like, I will get out of the trade when it goes against me $200. You need to learn how to identify the correct stop loss based on the market dynamics. You must know that your placement of stop loss should match the support and resistance levels. Then learn to adjust your trade size to manage your dollar loss.
How many risks there can be when you enter a market? A stop loss protects you from different types of risks. The value of having the stop loss in place prior to entering the market is that you can unemotionally determine the best exits possible for the different types of risk like the trade risk, the market risk, the liquidity risk, the margin risk, overnight risk and the volatility risk. As a rule dont try to risk more than 2% of your trading account in a trade. The position of your initial stop should be based on the rule of 2% risk on your trading account. Your stop loss position is determined by how much risk you are willing to take. For some advanced traders it is sometimes beneficial to risk more than 2% of their trading account on a single trade. However, the amount these traders risk must be carefully calculated depending on their proven historical performance statistics.
One of the greatest challenges for any trader is to finally come to the point where he/she firmly believes that a sound money and risk management program is vital. Placing stop loss correctly is an important part of the money and risk management program. Remember the saying that there should be some method to your madness. Learn the yin and yang of trading. When adjusting your stops due to an increase in trade size, always move the stops closer to your current position. An increase in trade size is usually caused by adding on or scaling in to a winning position. This lowers the risk in relation to your larger trade size.
When you trade, always try to develop an overall picture of the market using multiple time frames. As a rule, always set your stops on the same time frame as you entered your trade. Many traders want to know about moving stops based on different time frames. For example, if you had used a daily chart to enter your trade, use the daily chart to set your initial stop. For day traders there is a risk when holding a trade overnight. In day trading, you are supposed to close your position at the end of the day. Sometimes an opportunity arises and you decide to continue the trade overnight. There is always a possibility of unforeseen event occurring during the night.
In stock trading, unexpected event may create a gap open. This may adversely affect your account value. Suppose you are trading a 15 minute time frame. Therefore your stop loss and position size are based on the 15 minute time frame. Your trade is profitable and you see much more profits if you hold the position overnight based on your 15 minute chart 5 minutes before the close of the day. How do you decide to take the decision to let the trade continue overnight?
How To Place Stop Loss Rules
Consider the following 5 rules:
1) The 15 minute chart must indicate a solid trend in place.
2) You should place a new stop loss based on your daily chart.
3) The trade must currently be profitable.
4) Your risk should be no more than 2% of your trading account based on your new adjusted stop from the daily chart. Reduce your trade size.
5) When the market opens the next day, be sure to monitor your trade.
The better your stop strategy is, the more profitable you will be. So it is crucial from the profit point of view to refine your strategy. The most common thing that can happen in case of a poorly placed stop loss is that you will get stopped out on a correction. After being stopped out, the market will race back in the direction you were initially betting on. Now you should keep this in your mind that there are no perfect stops. There is also no way to time the market perfectly. Your goal should be to get the probabilities in your favor by choosing a risk/reward ratio of at least “. This risk to reward ratio will also tell you about the placement of your initial stop loss. Just dont forget, getting repeated stopped out will add to your commission fees and spreads making your trading cost higher.
Don’t pick an arbitrary place to put your stop loss. Position your stop loss in relation to the market activity. Many traders incorrectly choose a stop so their loss is the same amount each time they are stopped out. You are completely disregarding the meaningful market support and resistance levels where the stops should be placed if you use an arbitrary place for your stops. You need to place the stops in accordance with the market conditions.
Is there any rule that can tell you where to put your initial stop loss? Where to place your initial stop loss? Try to set your initial stop 3% below the support level. The important thing in this method is to correctly identify the support area. Test this method and see if it works for you. Suppose you have a trading system that can determine an entry point but does not provide an exit based on the market dynamics. First you need to identify the support area. Set your stop loss 3% below the support area.
The formula that you will use is (Support Price)*0.97(3% less) = Initial Stop Loss. For example, suppose that the support level in a bullish trend is $30. You should set the stop loss at 3% below the support level in a bullish trend if you have an area of support at $30. The formula that you will use is $30 (support price)*0.97 (3 percent less) = $29.1 (Initial Stop Loss Level). For example to say that you are willing to lose $200 in a trade is to disregard the current market conditions. Do not use arbitrary stops based on flat dollar amounts that you are willing to lose.
You are inviting failure if you do not use stops at all. Another good approach to place stop loss can be to set your stop loss one tick below the support in a bullish trend or one tick above the support in a bearish trend. For example in trading stocks, you are in trouble if you do not use stops and hang on to a losing trade to the point that you emotionally feel that the loss is so large that you cannot exit the trade.
Some markets have sharks in them. For example in the currency market, the brokers have many tricks up their sleeves. In the currency market it is better not to put the stop actually in the market when you have the position on. Some professional currency traders use mental stops only. Your broker will see your stop and if there are enough similar stops, the broker may try and hit your stop. This way the broker makes money and you do not. You can set a mental stop and get out quickly if you are hit in such a market like the currency market. But this will need psychological toughness and discipline to get out when you are supposed to get out.
As new trailing stops are determined, you can move your stops to lock in profits. In case you add on to your winning trade by increasing your trade size, you must adjust your stops to keep your risk in relation to your trade size. Never move your stop for emotional reasons especially when it is your initial stop. Learn how to place the stop loss correctly. As the trade progresses learn how to move the stops. Always move the stop closer to the current position to lower the risk in relation to your larger trade size when adjusting your stop due to an increase in trade size.
No related posts.
Related posts brought to you by Yet Another Related Posts Plugin.
Comment