1. Setting your initial stop loss order.
Unlike other swing trade products, SwingTrader combines fundamental analysis with Free Training Sessions · Enjoy Subscriber Access · Best Investing StrategiesStyles: Top Stock Lists, Investing Research, How to Invest, Stock News. Placing a stop loss or at least having a stop loss exit in mind is an important part of risk management.. You should always have a place to exit and that will allow you to risk X % of your trading account instead of simply guessing.
For the inside bar trading strategy, the stop loss can be placed in one of two places. The advantage to this placement is that it provides a better risk to reward ratio.
The disadvantage is that it opens you up to being stopped out before the trade setup has had a chance to play out in your favor. This then is obviously the riskier of the two inside bar stop loss placements.
As mentioned previously, the safer placement behind the mother bar is ideal in choppier currency pairs. Well I guess it does involve hands to place the stop loss. The key is to avoid the temptation to adjust your stop loss while in the trade. This has several advantages. The Hands Off approach reduces the chance of being stopped out too early by keeping your stop loss at a safe distance.
We all know the feeling of moving our stop loss too early and being stopped out, only to watch the market take off in the intended direction. You simply set the stop loss and walk away. As previously mentioned, the Hands Off stop loss strategy is not without flaw.
Using the Hands Off Forex stop loss strategy can also tempt you to move your stop loss. No lesson on stop loss strategies would be complete without discussing the controversial break even stop loss.
So why would I want to move my stop loss to an arbitrary level? Most traders who move their stop loss to break even will tell you that they do it to protect their capital. Everything we do in price action trading is based on price action levels, right?
Anyone in the world can see these levels, which why they work so well. Nobody else knows where you entered your trade, nor do they care. Once in place, any market movement to your original entry will be protected by your stop loss. Moving to break even means no market analysis is needed. The only place for you to move your stop loss is to your original entry point.
You always know exactly where your stop loss should be placed. A break even stop loss hinders your odds of success. By not giving your trade setup enough breathing room to play out in your favor. Above all, moving your stop loss to break even is lazy. How is this a disadvantage? When a trader moves a stop loss to break even, they are moving to a level that they have decided is important.
Yes, it does involve cutting your risk in half or thereabouts. Once the market closes on the second day after our entry, we can use the low highlighted in blue as a place to hide our stop loss. This may be acceptable for some and unacceptable for others. In this case leaving the stop loss at the initial placement might be the better decision. This would reduce the stop loss from pips to 50 pips. This stop loss method is designed for the strategies I trade.
Effective means it gets you out of trades that would have resulted in even bigger losses, but still allows you to profit when the price moves favorably. When I day trade ES futures I use a similar approach. Every day, every trade, my stop loss is the same. Since I always try to buy within one tick of a consolidation low or sell within one tick of a consolidation high, my stop loss is always 4 or 5 ticks on every trade.
This allows for me to rapidly place orders. My initial target goes 8 ticks away from my entry point when trading this market. If we were swing trading ES futures, and buying or selling on a consolidation breakout, then we would place a stop loss about 1 to 2 points outside the opposite side of the consolidation from the entry.
For day trading stocks, I use a bit of subjectivity because stocks vary wildly in terms of price and volatility. For most stocks I place my stop loss 2 to 3 cents outside the consolidation I am entering on.
Quickly look at prior trading opportunities within the stock to help gauge how far your stop loss should be outside the consolidation. For swing trading daily stock charts, my default is to place a stop loss 5 cents outside the consolidation. This is effective for many stocks, but often needs to be expanded if trading volatile or high-priced stocks.
In the daily chart swing trading example below, the stock is fairly volatile. While using a 5 cent stop loss outside the consolidation or below the most recent low would have worked, I actually opted to place a stop loss 20 cents below the most recent swing low. The chart shows two potential entry points based on the strategies I use, as the market sometimes provides more than one opportunity to get into a trade.
New traders should allow the market to hit their original stop loss or target: That said, some basic stop loss management is acceptable, such as reducing risk once a trade is closing in on the profit target. Only move a stop loss to reduce risk or lock in profits. Never move a stop loss to accommodate a growing loss hoping it will turn around if you give it more room!
While I often just get out of trades at my stop loss or target, I also have some guidelines that allow me to alter my stop loss or target during a trade, or alter my exit plan. With day trading and swing trading, control risk. Notice that every time starts to move above 20 the market begins to trend. I saw you trading tutorial video about ATR indicator. Since the ATR measures the average daily movement and changes of such movements it is ideal for stop loss placement in order to avoid being stopped out prematurely due to market noise or random trading fluctuations.
Identify ATR levels at the time you enter the position. You can see in this example the ATR level is clearly identified at any given time by looking at the lower section of the chart. Once you identify the correct ATR level at the time of entry you simply multiply it by 2 and subtract it from your entry price.
You can see in this example where I enter the market and where I place the protective stop loss level as well. In this example you can see the exact same process applied to a short position.
Before you get into a trade you will need a plan that will determine when to get out of the trade if it does not go in your favor. If this is your way of placing a stop loss order, stop doing that right now.
Our job is to protect our capital. Treat a stock like an employee.