Filed under Forex Strategies
I have received emails from some of my blog readers asking me this question and I think this is one of the important questions that have to be answered. Therefore I will like to answer it in the form of a blog post so that everyone of you reading this blog will benefit from it.
First of all, I am glad to receive this question from my readers as it shows me that you guys are using stop loss. There is nothing more dangerous than trading without a stop loss as a sudden big movement can totally wipe out your account.
The answer is pretty simple, if you are going LONG, your stop loss should always be 5 to 10 pips below the nearest support and if you are going SHORT, your stop loss should always be 5 to 10 pips above the closest resistance.
Let me go through some examples below:
1) Trend Line Break Trading – If you get a trend line break situation and you will like to enter a trade, you should then place your stop loss 5 to 10 pips above or below the trend line spot that the candle break out depending on whether you are going LONG or SHORT.
Trend Line Breakout
2) Triangle Breakout Trading – For this kind of breakout, it will work the same as the trend line breakout method. If you are going SHORT, you should place your stop loss 5 to 10 pips above the previous support of the triangle and vice versa.
3) Support and Resistance Trading – Depending on how you want to trade the support and resistance, there are different ways you can place your stop loss.
Support & Resistance Breakout
If you are trading reversal using support and resistance, you will enter a SHORT trade when the price hits the resistance and in this case, you will have to place a stop loss above the resistance and if you are entering a LONG trade when the price hits the support, you will then place a stop loss below the support level.
If you are trading the break through of support and resistance, it will be slightly different. If you are entering a trade when the price break below a support and you need to understand that the support that is being breached has now became a new resistance and you will then place your stop loss above this new resistance.
However you should always calculate the amount of stop loss that you have to place for a trade and see if you are able to take it before entering a trade.
If your limit for a stop loss is 30 pips and you see a setup that requires 50 pips of stop loss, you should not enter your trade as it has exceeded your acceptable level. These are my 2 cents on this area and I hope that it is useful to you.