Where to Put Your Stop Loss
|Where to put your stop loss|
The most basic rule I use for placing a stop-loss order on my trades is this:
I want to be taken out of the trade automatically when the market shows me that my initial idea or reason for entering the trade, is no longer valid.
When to place your stop lossI always place my stop-loss order together with my entry order. I usually enter on breaks or pullbacks using stop or limit orders. This means I will not be entering the trade immediately. Instead, I let to market trigger my trade.
But as I enter my entry order, I also enter an accompanying stop-loss order. This means that when my trade is triggered, I am immediately protected to the downside by an automatic stop order.
So, in my opinion, you should always place a stop order immediately. This gives peace of mind, as you know before you enter the trade, what you can lose at maximum.
How to place a stop loss in a trending marketIn a trending market, you could best place your stop-loss order below or above the previous swing low or swing high. The rationale behind this is that a market is trending as long as it is making higher highs and higher lows for an uptrend and lower lows and lower highs for a downtrend. Once price breaks this pattern our reason for the trade is no longer there.
Let us look at an example of a long trade on the USDCHF. On the below chart I have indicated where I might have placed an entry order to go long. There was an uptrend. Prices made higher lows. So as you entered the trade you could have and should have immediately placed a stop-loss order below the previous swing low.
The difference between your entry and your stop-loss is your maximum risk on that trade.
|Placing a stop loss in a trending market|
How to place a stop loss in a sideways marketIn a sideways market, placing a stop loss is slightly different. However, the basic rule also still applies.
A market is trading sideways when prices move in a range. It should be a wide range, else I consider the market as untradable. If the market is in a tight range, then this is called a choppy market. I think it is called this way because traders get chopped to pieces in these conditions.
Anyway, let’s look at another example of how to place a stop loss when you are trading in a rangebound market. You need at least two bounces to confirm the range. Then as you enter (see below chart) you place your stop loss on the other side of the previous swing low or high. In this case, it was a swing high.
|Placing a stop loss in a sideways market|
Finding good areasWhen looking for areas to place my stop losses I am actually looking for layers of protection. If we place our stops too tight, we might get taken out of a trade, that could have been a winning trade.
Especially in the Forex markets, the Big Banks like to play games. They push prices in one direction, only to take it in the opposite direction after taking out many (mostly retail) traders out of their trades.
This is also known as stop hunting. And do not think it is your broker that is doing this to you. It is the big players in the markets, the big banks, who are responsible for all of this.
So you need to protect your trade from being taken out prematurely by your stop loss.
Here are two ways I do this:
- Only trade on the daily time frame or higher.
- Place your stop behind multiple areas that could indicate your trade is invalidated
These are the layers of protection you can look out for:
- Horizontal support and resistance areas
- Diagonal support and resistance areas
- Fibonacci support and resistance areas
- Ichimoku based support and resistance areas, like the Ichimoku cloud.
- Moving average based support and resistance areas
- Candlestick patterns
Horizontal support and resistance areasThese are the areas I use most. You can see them on my charts on Tradingview. I also explain how I identify these areas on my charts in this post.
Diagonal support and resistance areasIn a trending market price tends to bounces of trendlines. So placing your stop behind these trend lines could give some additional peace of mind. See what I mean by looking at the below chart.
|Diagonal support and resistance areas|
Fibonacci support and resistance areasWe could possibly find another layer if we draw the Fibonacci levels on the swing lower. As you can see, we could widen our stop a bit. And by doing so adding another technical layer of protection. The idea is that in trends prices have a tendency to retrace to the 61.8% Fibonacci level if it is a strong trend. If prices retrace more it could indicate a weakening of the trend or even a turnaround. In both cases, we would not want to be trading in the direction of that (weakening or broken) trend.
|Fibonacci support and resistance areas|
Ichimoku based support and resistance areas
|Ichimoku based support and resistance areas|
Moving average based support and resistance areas
|Moving average based support and resistance areas|
Candlestick patternsIn the same chart above you can also see the stop placement coincides with the top of the wick of the candle. Candlestick patterns like this show intraday turning points. And again if the price moves past this turning point of the previous day, it is likely that the trade has gone bad and that we should exit the position. These patterns are the bread and butter of how I trade. If you want to learn more about my method, then I recommend you first follow my free trading course on my blog here.
So I usually look for at least two layers to put my stop loss behind when trading of the daily timeframe. The more layers confirm the same area the better.
Should you move your stop loss once you are in a trade?No, you should not need to move the stop loss once your position is open. At least, you should never widen the stop loss on your trade. If you want, you can tighten the stop loss as your trade moves into profit, eventually locking in some of these profits.
If you just started to learn how to trade, then I suggest you simply place your stop and either be taken out of the trade by your stop-loss order or hopefully by your take profit order :-).
In any case, know that you will get stopped out. Just look at my win rate. It is about 40%. This means that I get stopped out of 60% of my trades. I see this as the cost of doing business. After reading this post I hope that you will no longer, or at least less often, get whipsawed out of your trades and out of your money.
Good luck trading!
Read next: Where to Put Your Take Profit
If you liked this post. Please share it!