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TECHNICAL ANALYSIS

Using Technical Analysis for Stop Loss Placement

using, Technical Analysis, Stop Loss, Placement, fx trader, forex

Introduction

I consider risk management the second most important aspect of trading, behind psychology. If anyone is thinking about trading without stop loss or any risk management in place, he or she will not last long in the market. Stop losses can also be useful to take profits when positions become profitable, and they should stop you from losing money when the trend changes. A prime example of this is when the Swiss National Bank removed the peg against the Euro and many traders lost a lot of money. When guaranteed stop losses are put in place, you will keep and manage your position safely.

Training at the Society of Technical Analysts (STA) helped me identify where key reversal zones may take place in the market and I have learnt to use technical analysis to manage risk by trailing my stops to lock in profit and make sure I don’t lose more than a certain amount of money, or to put my stops in the right places in the first place once I open a trade.

Managing positions is a vital part of trading and without it I would not be a profitable trader.

Methodologies

There are many different trading styles. For example some people prefer to trade very short time frames, while others trade daily and monthly time frames. Personally, I have two strategies. One which is a longer term strategy in which I am in trading positions for months and another one which is a short time frame strategy, which I use primarily for the index future’s market. For both I manage stop losses very carefully.

There are a number of technical analysis tools to manage stop losses including support and resistance, trendlines, moving averages, key market numbers in the market, ATR measures, Ichimoku charts, market profile charts, or point and figure charts.

Support and resistance and trendlines work very similarly, what you have to do is plot levels in the market that have been respected in the past and mark trends carefully either up or down and follow the trades with a trailing stop loss either long or short and keep moving stop losses to higher or low levels as the market moves in your favour.

Figure 1 shows three circled examples of how you can trail a stop in a trend using support and resistance and trendlines.

Using, Technical Analysis, Stop Loss, Placement, fx trader, forex fig 1Figure 1. Trailing a stop using support and resistance and trendlines. 

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