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Chapter 35, Part II. Ways to Place Stop-Loss Orders. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 28, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Hm, I'm curious and what about money management and other stuff?

    Commander in Pips: I see that you have studied the previous material without necessary diligence. Otherwise you should know that money management system is a part of your overall trading system but not self-sufficient substance. A money management system is used in lime your with trading system and according to its demands. So, risk control system is a tool of overall trading approach. Hence, if it has not been linked with your system it becomes useless or even dangerous, because your stop absolutely will not take into consideration real price action, technical picture and overall market environment. Here is an example for you:

    Chart #1 | EUR/USD 60 min

    Let’s suppose, that you intend to enter Long by Gartley “222” pattern and reaching of 0.618 target of AB=CD pattern. Then, if you use just equity stop, you will place it stably for 30 pips, since this is, for example, 1.5% of your assets and that is corresponds with your money management, as you’ve said.

    Later you will see that you have placed your stop not at invalidation area, but in a most unwelcome place – just below the previous low. Some time after, you can see an excellent Wash and Rinse pattern that has triggered upward continuation. Your stop should take into account the technical picture to be placed at a really crucial point. So, that if the market will reach it you can say – “That’s all, buddy, the market has passed the point of no return - there is no road back for now and it’s time to get out”…

    Well, here I think, I have to place stop at least below 0.618 support, or even below AB-CD completion point of 1.33, since in this case it still could be “222” pattern.

    Commander in Pips: Absolutely. See – your stop has to be chained to your trading system, your context for trading. And this fact absolutely does not cancel application of money management, as you can see. You want to risk just 1.5% - that’s great, do it, but place the stop correctly.

    Now I see. Indeed, here is no contradiction – I can, for instance, reduce my lot size a bit, but place stop correctly – below the 0.618 Fib support or even reduce it a bit more and place stop below AB=CD 1.33 target. At the same time I will not lose more than 1.5% in this trade and my money management system will hold and work properly. Excellent stuff!

    Commander in Pips: Right, I’m glad that you’ve got it. Stop is not an issue that tells you how much you’re ready to lose – this is a question of money management. Stop is an area that tells you that the market will continue move against you with high probability.
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