Stop Loss: How To Calculate Like A Pro

  • Print Article |
  • Send to a Friend |
  • |
  • Add to Google |

In the filed of technical analysis and serious trading, calculating a stop loss is a tricky job; there is no hard and fast method. This is especially true for forex breakout trading. So let us clear the basic situation a little bit elaborately,

why we need a stop loss??

i think the answer should be, after entering a forex breakout trade, there are lot of chances, lot of unforeseen activities in the market, which can go against our trade, when we are using a stop loss, we are just limiting those unforeseen factors up to that level (stop loss level), and unless this level is breached, we will hope that the force which is going against our trade, will reverse in our favor.

That means, here we strongly believe two things:-

  1. Until the stop loss level is breached, there is possibilities, that the force may reverse in our favor. 
  2. There will be less or absolutely no possibility for us if the level is breached by any means

now, let us incorporate these two points into a real life situation of forex trading.

Suppose, we are to short, then as per technical analysis, we will try to short at resistance and will try to cover at a support, so here the resistance is the cause of the trade, and this resistance, until breached, will resist the price and price will go down and by any means, if this resistance is breached, then price will go upward and the resistance will act as a support to that up move, so in case of breaching this resistance, our trade becomes meaningless.

So this resistance level, with some cushion will act as our stop loss in case of buy trade (long), we will buy at support and sell at resistance, and this support is the cause of buying ,hence it, with some cushion, should be our stop loss.

Each time we using some cushion, because, due to intraday volatility, the support/resistance can be breached, but may not sustain, if we don't use a cushion with the original sup/resi level, then our sl will be hit and then price will reverse now our job will be to find out the points which has such characteristics, though it will vary case to case, but we can say some important ema, specially those who are Fibonacci numbers such as 8/13/21/34/89 ema, upper and lower levels of Bollinger band, in case of forex breakout trading, the break out level(the upper trend line of the pattern) break down level (lower trend line of the pattern) can be considered as a potential sl.

In addition to that those who use pivot points, cam level, fib level, can also use these levels as their stop loss last but not least, in some cases, we may find that stop loss, calculated by any of the aforesaid methods, if get breached, will deliver a serious blow to our economical health, so our fingers might itch to bring it down to a comfortable level, BUT NEVER EVER DO THAT,IF WE DO THIS, THEN THE SIGNIFICANT OF THE STOPLOSS WILL VANISH AND OUR POSITION WILL BE VULNERABLE, IF WE CANT AFFORD TO GET THAT STOP HIT, WE JUST AVOID THAT TRADE AND FIND ANOTHER ONE, WHERE, WE CAN DIGEST THE SL HIT, so instead of searching a trade by profit prospect, its always better to search a trade where risk component is low.

Article Rating (5 stars):
  • article full star
  • article full star
  • article full star
  • article full star
  • article full star
Rate this Article:
  • Article Word Count: 561
  • |
  • Total Views: 216
  • |
  • permalink
  • Print Article |
  • Send to a Friend |
  • |
  • Add to Google |
Popular Articles by tushar chatterjee
>