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Chapter 35, Part II. Ways to Place Stop-Loss Orders. Page 3

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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    Technical or chart stop

    Since we apply charts in both short-term and long-term analysis and even traders who mostly use fundamental analysis still use charts to estimate potential areas where to enter the trade, we have to use them also for stop placing. If the market tells us what it intends to do by charts, so, it makes sense to use charts to understand where to place stops. In fact, chart stop could be placed with two possible ways, depending on what is your triggering scenario. As we know this could be either some pattern or trend, or maybe their combination also.

    Stop-loss placing with patterns trading

    If your triggering scenario is some pattern then the invalidation point will be the pattern’s failure. Hence, stop should be placed somewhere beyond this point – just to get 100% confidence that pattern has failed and your attempt wasn’t successful. Let’s take a look at following examples:

    Chart #2 | EUR/USD 60 min

    Here you can see three possibilities for trading that are based on some patterns. First, it could be “sell” by a bearish engulfing pattern. So, if you intend to sell with it you have to place stop above the high of this pattern, since we know that the invalidation point of this pattern is that high. Second, let’s suppose that you decide to anticipate a Butterfly “Sell” pattern in C point at 1.3447. You see, that it very close to 1.3443 low and risk/reward ratio is tremendous. The invalidation point of Butterfly precisely is 1.3443 low, as we know it, because if the market will break it – it will erase the initial X-A swing of butterfly. And finally, you decide to sell on the 1.27 butterfly – very well, but you have to place stop above the 1.618 extension since, as we’ve discussed, if the market moves above it, then the probability of an upward continuation becomes significantly higher and in most cases the butterfly fails. So, as you can see that it is very simple to place stops with different patterns, because any pattern has its own well-known and definite failure points and target level.

    The second step is to adjust your position value, according to risk management rules. For instance, if you apply 1.5% maximum loss in any trade and your account is 10,000 USD, you can place, say 1.3595 stop loss and sell at 1.27 butterfly’s level at 1.3543. This is approximately a 50 pips stop, hence you can trade it with 0.3 lot – not bad, if we will take into consideration the following move…

    Sounds very logical and clear, thanks. But what is about the second scenario?
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