One on the most difficult tasks that traders have is determining the correct quantity of risk exposure when entering a trade. Since every trade really should be accompanied by a protective stop-loss order, the question always depends upon “how much room should I permit the market to move against me prior to stopped out?”
Some traders depend upon previous support and resistance levels as being a place to placed their stops. However, often these areas are gunned for because floor traders are aware that there are plenty of orders waiting there for your taking.
Some traders will draw lines below or higher sloping trends and make use of that as being a stop-loss reference, often expecting the target continue achievable pattern. But then, how often do we observe that pattern get violated right once we discover it truly is there?
Others uses some percentage value, either according to some fixed profit expectation or even a percentage of funds available, to discover their initial stop-loss.
There are lots of different solutions to picking a stop-loss. My personal preference and what I believe being the best approach many times is to use the expected and confirmed swing price.
What do I mean by ‘expected and confirmed’ swing price?
As of 2019, it’s been 30 years that I have devoted to the science and mathematics of market behavior. More specifically, forecasting market swings (aka turns) upfront. This approach takes a firm comprehension of several strategies of forecasting, such as the popular and well-exposed techniques involving Fibonacci and Gann ratios, to mention just two. There are so many more!
By learning and applying various market timing techniques that can expose the actual cyclic behavior on the markets, the trader will then use this information to ‘shorten the danger exposure’ associated with a given trade.
Here is just how this works.
Suppose by using using some proven way of determining high-probability market turns you get right to the expectation that the swing bottom is very likely to happens to the next day or two (with the very latest). Your technique is usually 80% or better in accuracy, and that means you do not have to be worried about whether it will probably be on time (say tomorrow), or one day late (the next day).
The grounds for this is that, as you already know having a high penetration of certainty in the probability for your swing bottom, you only place your ‘buy stop’ order for admittance to go long just over the high price in the day you expect the swing that occurs. If the order is triggered, you immediately place your stop-loss slightly below the low of these same bar as it just ‘confirmed’ being a swing bottom. Your initial risk exposure would be the range of this swing bottom price bar. The probability that it’ll hold and never get you knocked out that has a loss is extremely low when you knew with high-probability the swing bottom was going to take place on that day to start with.
Now suppose that this swing bottom is going to become one bar late as earlier stated as is possible. In that case, your buy-stop had not been triggered and you may do the same routine the following day for the one-day late bar. Same rules apply.
The real trick, once you’re in your trade, is going to be on managing the trade and adjusting your stop-loss since your position moves deeper and deeper into profit territory. That is a entirely unique subject for a totally article. But for that subject available, discovering the right time and price to wear your initial stop-loss order where it’s not too small or too large isn’t only also important, nonetheless it can save you lots of money, stop you in more trades, and help you stay out of trades you later are glad about.