Moving averages are a very useful tool when the market is in a strong trend and they can help identify these trends easily. My favourite moving averages are the 55 EMA and the 100 SMA on the longer time frame charts and the 21 EMA for the shorter intraday charts.

As the market moves in your favour away from the moving averages, the moving average can act as a stop guideline for you to move your stops according to where the moving average is positioned. An example of this can be if you are in a long position and the price is above the moving average. If the price keeps moving high above the moving average, the moving average will move higher and follow the price. Now once the price crosses below the moving average the stop can be triggered.

using, Technical Analysis, Stop Loss, Placement, fx trader, forex fig-2Figure 2: Trailing a stop using a Moving Average

ATR can be very useful when measuring market volatility. A standard ATR can help measure a normal range of market movement, therefore, with the ATR indicator, you can keep the stop loss at ATR - this means that when there is a very volatile move you can secure your profits or not lose too much money when the market moves against you.

Market profile is my favourite for intraday trading (if you are not aware of market profile charts I recommend reading the book from Peter Steidlmayer). What we do is establish a mean price. Once this is done we can look for standard deviations and place stops outside those deviations during range bound markets and during trending markets (double or triple distribution). We can move the stop loss in line with the next value area or single print as the price gets higher and higher. Another important part of MP Charts is that if we are expecting a mean reversion we can have a very tight stop loss above a single print. 

In Figure 3 we have an upward trend and what I am looking to do is place the stoploss at the bottom of the lowest print in today’s session marked by an arrow. Then what I am looking for is the trend to break upward and find a new value area higher and move the stoploss to the next single print under that new higher value area.

using, Technical Analysis, Stop Loss, Placement, fx trader, forex fig-3Figure 3: Trailing a stop using market profile

Point & Figure charting is different altogether as it has predetermined stop losses if used correctly and this is based on the length and velocity of the move. I feel P&F charts are amazing at pointing out supply and demand balance areas and if the price moves away where the next area of balance maybe.  For risk control this makes perfect sense as if a position goes against you it will give you an idea of just how much risk to lay down for the position.

In the example shown in figure 4 we have a break of a consolidation area and the stoploss is just above. When the break moves further down the stop order can then be moved to the arrow to lock in some profit.

<<Previous     Next>>