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Chapter 35, Part II. Ways to Place Stop-Loss Orders. Page 5

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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    So, how it will be on practice? This is daily EUR/USD chart. We see 8-bars thrust, based on 3x3 DMA. So, downward momentum is nice:

    Chart #4 | EUR/USD Daily

    Now we have to look at trend by MACD. For simplicity I will use the DiNapoli MACD Predictor. We already have spoken about it when discussing market pressure pattern. This indicator is derivative from the simple MACD. When MACD shows line crossing and trend shifting – MACD predictor crosses the price chart. I intentionally will have them both on the chart. When price stands below the red line of MACD Predictor – the trend is bearish, when above it – bullish.

    So, on chart #5 we clearly see that the trend is strongly bearish. And we see that the market is starting to show upward retracement after the 8th bar of thrust – that is our chance to enter short. By the way if you will make overbought/oversold analysis here with Detrended oscillator or Momentum you will find out that the market has hit daily oversold with the 8th bar. Let’s suppose that we have two possible areas to enter – 0.382 resistance or 0.618 (they could be different and not necessary Fib levels). Since the daily oversold has been corrected when market has hit 0.382 resistance at 1.39 we can think about entering short. But what will be our invalidation point? As we’ve said this is trend breakeven – if the daily trend will turn bullish our context will be broken. MACD Predictor shows, that this point is 1.4067 for 16th of September – slightly below 0.618 resistance. Pay attention that this point will be dynamic, because MACD value will change day by day and this point will drift lower. But how do we know that market will not proceed any higher and that we have to enter right here? For that purpose we need lower time frame…

    Chart #5 | EUR/USD Daily and MACD - “Context time frame”

    Chart #6 | EUR/USD 4-hour - “Entering time frame”

    We will use the 4-hour time frame as “Entering” one. To estimate should we enter short here or not, we need 4-hour trend turning in the same direction as our context trade, i.e. daily and down. Here we see, that right from the point, when the market has hit oversold – 4-hour trend has turned bullish. This tells us that retracement is still under way. Then market has hit 0.382 daily resistance at 1.3904 and price has turned south. The market was not at oversold at this time. A bit later the 4-hour trend has turned bearish by close – that is what we want.

    To enter short we need nearest 0.382 resistance from the most recent swing down on 4-hour time frame – 1.3811 and enter short. Initial stop we have to place above 1.4067 – MACD daily trend breakeven point as we’ve estimated higher.

    While the market has started move in your favor – you may tight stop by daily MACD or even manage them based on 4-hour time frame, move it to breakeven and so on.

    Well, this is really cool stuff! But can I place the stop a bit differently – for example above the MACD Predictor on a 4-hour chart by close?

    Commander in Pips: Well, it could be done, but better to apply this approach when you will get a bit more experience. The point is that the market could hold daily trend bearish, but show 4-hour AB=CD retracement. And 4-hour trend will turn bullish for the second time. In this case your stop will be triggered. If you can estimate what kind of move it will be on 4-hour – then you can do this. A safer approach is to link stop with context time-frame. In our example this is daily one.

    And should I use any patterns on lower time frames to estimate where to enter on 4-hour?

    Commander in Pips: Yes. This is also a bit advanced but if you can do it – you have to do it. In fact, if you will enter from 0.382 4-hour resistance due some pattern on 30-min chart, then you can place even tighter stop. So you can combine patterns with trend trading – use patterns to enter at some predefined levels. But again – this is a bit extended and demands some experience dealing with multiple time frame analysis.

    Something else?

    Commander in Pips: You also have to use oversold/overbought analysis for stop placement and entry levels estimation. For example, if daily overbought is closer to current market than trend breakeven point by MACD – probably you can use overbought level to place your initial stop. The same is with estimation possible entry levels. If at 0.5 resistance the level trend still holds but it beyond overbought – then you probably should focus on just 0.382 retracement. In other words, act according to your trading plan. We said that it has to include oversold/overbought analysis and logic will help you to make proper choice.

    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer soon.

    Note: FPA ranks are earned in the battles against scam, not in the classroom.
    Cypriano likes this.
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