One from the most difficult tasks that traders have is determining the correct quantity of risk exposure when entering a trade. Since every trade must be accompanied by a protective stop-loss order, the question always boils down to “how much room should I encourage the market to move against me prior to getting stopped out?”
Some traders depend upon previous support and resistance levels as being a place to place their stops. However, often these areas are gunned for because floor traders understand that there are plenty of orders waiting there for that taking.
Some traders will draw lines below or higher sloping trends and make use of that being a stop-loss reference, often expecting the industry to continue with this pattern. But then, how frequently do we identify that pattern get violated right once we discover it truly is there?
Others make use of some percentage value, either dependant on some fixed profit expectation or maybe a percentage of funds available, to find out their initial stop-loss.
There a variety of different ways to picking a stop-loss. My personal preference and what I believe to get the best approach usually is to use the expected and confirmed swing price.
What do I mean by ‘expected and confirmed’ swing price?
As of 2019, it’s been 30 years that I have dedicated to the science and mathematics of market behavior. More specifically, forecasting market swings (aka turns) upfront. This approach needs a firm comprehension of several strategies to forecasting, for example the popular and well-exposed techniques involving Fibonacci and Gann ratios, to mention just two. There are so many more!
By learning and applying various market timing techniques that hopefully will expose the main cyclic behavior on the markets, the trader might use this information to ‘shorten the danger exposure’ of the given trade.
Here is just how this works.
Suppose by means of using some proven means of determining high-probability market turns you get through the expectation that your swing bottom is especially likely to happens to the next day or two (for the very latest). Your technique is usually 80% or better in accuracy, which means you do not have to bother about whether it is going to be on time (say tomorrow), or one day late (the very next day).
The basis for this is that, as you are already know which has a high amount of certainty on the probability for that swing bottom, simply place your ‘buy stop’ order for admission to go long just on top of the high price with the day you expect the swing that occurs. If the order is triggered, you immediately place your stop-loss just beneath the low of their same bar since it just ‘confirmed’ to be a swing bottom. Your initial risk exposure could be the range of this swing bottom price bar. The probability that it’s going to hold and never get you knocked out which has a loss is incredibly low simply because you knew with high-probability that this swing bottom was going to happen on that day to start with.
Now suppose that this swing bottom is going to become one bar late as earlier stated as you possibly can. In that case, your buy-stop had not been triggered and you may do the same routine in the morning for the one-day late bar. Same rules apply.
The real trick, when you are in your trade, is going to be on managing the trade and adjusting your stop-loss since your position moves deeper and deeper into profit territory. That is a completely subject for a entirely unique article. But with the subject taking place, choosing the best time and price to use on your initial stop-loss order where it can be not too small or too large it isn’t just also important, however it can save you a lot of cash, make you stay in more trades, and help keep you out of trades you later are glad about.