Forex daily chart stop loss

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Learn Forex: How to Set Stops.
Price action and Macro.
Article Summary: Many traders know that they need to place stops, and if they don’t know they will likely learn very quickly. Market movements can be unpredictable and the stop is one of the few mannerisms that traders have to prevent one single trade from ruining their careers.
When traders begin to learn to trade, one of the primary goals is often to find the best possible trading system for entering positions. After all, if the trading system is good enough, all the other factors like risk management, or trade management – well, they can take care of themselves, right?
After all, if our trades are moving in our direction and we are making money, all of these other factors might seem unimportant: All we have to do is find that system that works at least the majority of the time, and then most traders figure they can figure everything else out as they go along.
Unfortunately, the truth is that all of the above assumptions are hogwash. There is no system that will always win a majority of the time, and without trade, risk, and money management – most new traders will be unable to reach their goals until they make some radical changes to their approach.
This is a wall that many traders will hit, and a realization that will become part of most of their realities. Because likely, none of us will ever walk on water, or have a crystal ball so that we can display super-human capabilities of predicting trend directions in the Forex market.
Instead, we have to practice risk management ; so that when we are wrong, losses can be mitigated. And when we are right, profits can be maximized. Once again, most traders that will find success in this business are going to come to this realization before they can adequately address their goals.
Realizing that risk management must be practiced is one thing, but doing it is an entire different matter. That’s what this article is about, investigating the importance of using stops and then further, some various ways of doing so.
Why are stops so important?
Stops are critical for a multitude of reasons but it can really be boiled down to one simplistic cause: You will never be able to tell the future. Regardless of how strong the setup might be, or how much information might be pointing in the same direction – future prices are unknown to the market, and each trade is a risk.
In the DailyFX Traits of Successful Traders research, this was a key finding – and we saw that traders actually do win in many currency pairs the majority of the time. The chart below will show some of the more common pairings:
Traders saw greater than 50% winning percentages in many of the most common currency pairs.
So traders were successfully winning more than half the time in most of the common pairings, but their money management was often SO BAD that they were still losing money on balance. In many cases, taking 2 times the loss on their losing positions than the amount they gain on winning positions. This type of money management can be damaging to traders: necessitating winning percentages of 70% or greater merely to have a chance at breaking even. The chart below will highlight the average loss (in red) and the average gain (in blue).
Traders lost much more when they were wrong (in red) than they made when they were right (blue)
In the article Why do Many Traders Lose Money , David Rodriguez explains that traders can look to address this problem simply by looking for a profit target AT LEAST as far away as the stop-loss. So if a trader opens a position with a 50 pip stop, look for – as a minimum – a 50 pip profit target. This way, if a trader wins more than half the time, they stand a good chance at being profitable. If the trader is able to win 51% of their trades, they could potentially begin to generate a net profit – a strong step towards most traders’ goals.
But now that we know that stops are critical, how can traders go about setting them?
Setting Static Stops.
Traders can set stops at a static price with the anticipation of allocating the stop-loss, and not moving or changing the stop until the trade either hits the stop or limit price. The ease of this stop mechanism is its simplicity, and the ability for traders to ensure that they are looking for a minimum 1-to-1 risk-to-reward ratio.
For example, let’s consider a swing-trader in California that is initiating positions during the Asian session; with the anticipation that volatility during the European or US sessions would be affecting their trades the most.
This trader wants to give their trades enough room to work, without giving up too much equity in the event that they are wrong, so they set a static stop of 50 pips on every position that they trigger. They want to set a profit target at least as large as the stop distance, so every limit order is set for a minimum of 50 pips. If the trader wanted to set a 1-to-2 risk-to-reward ratio on every entry, they can simply set a static stop at 50 pips, and a static limit at 100 pips for every trade that they initiate.
Static Stops based on Indicators.
Some traders take static stops a step further, and they base the static stop distance on an indicator such as Average True Range. The primary benefit behind this is that traders are using actual market information to assist in setting that stop.
So, if a trader is setting a static 50 pip stop with a static 100 pip limit as in the previous example – what does that 50 pip stop mean in a volatile market, and what does that 50 pip stop mean in a quiet market?
If the market is quiet, 50 pips can be a large move and if the market is volatile, those same 50 pips can be looked at as a small move. Using an indicator like average true range, or pivot points, or price swings can allow traders to use recent market information in an effort to more accurately analyze their risk management options.
Average True Range can assist traders in setting stop using recent market information.
Created by James Stanley.
Using static stops can bring a vast improvement to new trader’s approaches, but other traders have taken the concept of stops a step further in an effort to further focus on maximizing their money management.
Trailing stops are stops that will be adjusted as the trade moves in the trader’s favor, in an attempt to further mitigate the downside risk of being incorrect in a trade.
Let’s say, for instance, that a trader took a long position on EURUSD at 1.3100, with a 50 pip stop at 1.3050 and a 100 pip limit at 1.3200. If the trade moves up to 1.31500, the trader may look at adjusting their stop up to 1.3100 from the initial stop value of 1.3050.
This does a few things for the trader: It moves the stop to their entry price, also known as ‘break-even’ so that if EURUSD reverses and moves against the trader, at least they won’t be faced with a loss as the stop is set to their initial entry price. This break-even stop allows them to remove their initial risk in the trade, and now they can look to place that risk in another trade opportunity, or simply keep that risk amount off the table and enjoy a protected position in their long EURUSD trade.
Break-even stops can assist traders in removing their initial risk from the trade.
Created by James Stanley.
But what if EURUSD moves up to 1.3190 and our trader decides to get greedy? Well, in this case, they can remove the limit altogether and instead look to trail their stop as the trade moves higher. After price moves to 1.3200, the trader can look to adjust their stop higher to 1.3150, a full 50 pips beyond their initial entry so now, if price reverses, they are taken out of the trade for a 50 pip gain.
But if EURUSD moves higher, to 1.3300 – they can enjoy a larger upside than they initially had with their limit at 1.3200.
Traders can look to manage positions by trailing stops to further lock in gains.
Created by James Stanley.
This is maximizing a winning position, while the trader is doing their best to mitigate the downside.
Dynamic Trailing Stops.
There are multiple ways of trailing stops, and the most simplistic is the dynamic trailing stop. With the dynamic trailing stop, the stop will be adjusted for every .1 pip the trade moves in the traders favor.
So, at the outset of the trade in the above example, if EURUSD moves up to 1.3101 from the initial entry of 1.3100, the stop will be adjusted up to 1.3051 (increased 1 pip for the 1 pip move the trade made in the trader’s favor).
Dynamic Trailing Stops adjust for every .1 pip that the trade moves in the trader’s favor.
Created by James Stanley.
Fixed Trailing Stops.
Traders can also set trailing stops through Trading Station so that the stop will adjust incrementally. For example, traders can set stops to adjust for every 10 pip movement in their favor. Using our previous example of a trader buying EURUSD at 1.3100 with an initial stop at 1.3050 – after EURUSD moves up to 1.3110, the stop adjusts up 10 pips to 1.3060. After another 10 pip movement higher on EURUSD to 1.3120, the stop will once again adjust another 10 pips to 1.3070.
Fixed Trailing stops adjust in increments set by the trader.
Created by James Stanley.
If the trade reverses from that point, the trader is stopped out at 1.3070 as opposed to the initial stop of 1.3050; a savings of 20 pips had the stop not adjusted.
Manually Trailing Stops.
For traders that want the upmost of control, stops can be moved manually by the trader as the position moves in their favor. This is a personal favorite of mine, as price action is a heavy allocation of my approach, and many of my strategies focus on trends or fast moving markets.
In the article, Trading Trends by Trailing Stops with Price Swings , we walk through this type of trade management. When using price action, traders can focus on the swings made by prices as trends move higher or lower. During up-trends, as prices are making higher-highs, and higher-lows – traders can move their stops higher for long positions as these higher-lows are printed. Once a ‘higher-low’ is broken, the trader will exit the trade under the presumption that the trend that they were trading may be over.
Trader adjusting stops to lower swing-highs in a strong down-trend.
--- Written by James Stanley.
To contact James Stanley, please JStanleyDailyFX . You can follow James on Twitter JStanleyFX.
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12 Ways to Avoid Premature Stop-Loss Triggers.
Beginners avoid placing a stop-loss order because of the difficulty in striking a balance between two conflicting criteria – avoiding unnecessary triggers and preventing wider losses. If the stop-loss price is too close then there will be frequent losses with exits from even good entries. On the other hand, a stop-loss order far away from the entry point will result in rare but wider losses. The ideal stop-loss order should be the one, which would not cause a premature exit because of spikes but provides an early exit in case of a trend reversal.
I would suggest using the following tested methods to avoid premature stop-loss triggers:
Guest post by Andriy Moraru of Earn Forex.
1. Percentage stop.
This is the most basic approach to the placement of stop-loss orders and is very popular among new traders. The stop-loss price is determined based on the maximum percentage risk a trader is willing to take on the account size. This way, a stop-loss is placed at the longest distance possible given the percentage risk and the trade size. For example, if the percentage risk is 2% and the account size is $10,000 then a trader closes the position upon reaching a loss of $200; with one mini-lot of EUR/USD it means a stop-loss distance of 200 pips, which is about four times the average daily range for this currency pair. As a result, the possibility of premature stop-loss execution is almost entirely eliminated. Of course, this method is not recommended except for some very special cases when normal technical or fundamental analysis stop-loss placement cannot be applied.
2. Bollinger Band stop.
The strategy is based on the volatility of a given asset. It is a well known fact that volatility reflects the probable price movement of a security in a given period of time. Thus, by keeping the stop-loss order in accordance to the volatility of a security, premature exits can be prevented.
To achieve the objective, a Bollinger Band indicator is used to visually measure the volatility. The stop-loss order is then placed above (short position) or below (long position) the Bollinger band. Such a process prevents premature exit from the trade.
3. Trend line stop.
The process involves identifying the major support/resistance for a security’s price. Once a long position is taken based on a tested trading system, the stop-loss order is placed below the major support. Similarly, for a short position, a stop-loss order is placed few notches above the major resistance. The strategy is based on the assumption that if price closes above resistance or below a support then the forecast is no longer valid. It is important to have some buffer between the actual stop-loss level and the support/resistance level.
4. Moving average method.
To begin with, a higher period moving average (50 or 100-period) is included in the price chart. Now, the stop-loss order is placed above the moving average for a short position and vice-versa. Care should be taken to place the stop-loss order little away from the moving average. The strategy ensures that a trade is taken away only when there is a firm trend reversal. Although it is a popular method, it has its weakness – shorter period MAs are often violated by the price action while the longer period MAs result in too stop-loss distance that is sometimes too big.
5. ATR (Average True Range) method.
This is another volatility-based strategy, which professionals often apply. The value of ATR indicates the average price movement (volatility) of a security over a given period of time. For example, in the case of a currency pair, if the ATR value equals 100 on a daily chart for a standard ATR input parameter of 14, then it implies that the currency pair has moved 100 pips per day on an average for the past 14 days. Thus, a stop-loss price in this method is determined using a certain percentage of the average true range value over a given period. Considering the same example above, if a trader uses ATR-based stop of 100 pips or more, then the stop-loss order will be triggered only if the volatility increases above the normal range. Thus, the chance of a premature trigger is lessened.
6. Parabolic SAR stop.
It is also one of the easiest methods to avoid a premature exit from a trade. To implement the strategy, a parabolic SAR indicator is attached to the price chart. The indicator is displayed as a series of small dots above or below the price bar to indicate the prevailing trend. An uptrend is indicated by the formation of SAR below the price while a downtrend is suggested by the formation of SAR above the price. At the beginning of a new trend, the price starts diverging from the parabolic SAR. As momentum begins to slow, the indicator (dots on price chart) closes down (converges) the gap to finally touch the price bar. The parabolic SAR then begins to form on the other side of the price indicating an impending reversal. If a long position is taken then a stop-loss is placed few notches below the parabolic SAR level. Similarly, a stop-loss order is placed few notches above the parabolic SAR level after taking a short position. The process ensures that fake trend reversals do not create a premature exit. However, it should be remembered that parabolic SAR stop will not work successfully in a range bound market.
7. High/Low stop.
The strategy involves placing a stop-loss order below the recent high or low. For example, if a trader uses a 1hr chart to enter a long trade then the stop-loss order is placed below the lowest price registered in the past one hour. Likewise, a trader using an H1 chart to enter a short trade should place a stop-loss order above the highest traded price in the past one hour. Thus, only a fresh movement against the prevailing trend can remove the stop thereby eliminating the possibility of a premature exit from a trade. This method is best suited for scalping trading strategies.
8. Fibonacci stops.
The Fibonacci levels are undeniably a major concept in the mind of traders when deciding the market turn around points. The 61.8% Fibo level is a widely followed retracement level since it enables a trader to assess whether an asset is currently bullish or bearish. Under this strategy, a stop-loss order is placed few notches above the 61.8% level in the case of a short position. In the case of a long position, the stop-loss order is placed few notches below the 61.8% level. The process has the potential to avoid the premature exit from a trade. Only when there is a firm reversal, the stop-loss order will be hit.
9. Standard deviation based stops.
This is another volatility-based method to calculate the stop-loss price level. The standard deviation values reflect the probable range of price surges of a security for a given period of time. By placing the stop-loss order at accurate number of standard deviations away from the average price of a security, a trader can make it highly improbable for the stop-loss to be triggered by random spikes. Unfortunately, this method assumes normal distribution of price changes, which is rarely a case in Forex trading.
10. Elliott wave based stops.
The Elliott wave stop levels are determined by the three basic tenets of wave principle:
Wave two can never retrace more than 100% of wave one: Based on this rule, once a long position is taken, a stop-loss order can be placed few notches below the origin of wave 1. Wave four may never end in the price territory of wave one: This rule assists in placing protective stops in anticipation of capturing the final (fifth) impulse wave move to new highs. Wave three may never be the shortest impulse wave among waves one, three and five: Using this rule, a stop-loss order can be placed for a short position. The stop-loss price should be at least few ticks above the price level where wave five becomes longer than wave three.
11. Pin bar stop.
A pin bar can be identified visually. It would be a long bar protruding amidst other candles. The open and close of a pin bar will lie within the high and low of the previous candle. A trader can place a stop-loss order above the pin bar, after initiating a short position. The stop-loss would be taken out only if there is no trend reversal. Similarly, a stop-loss order for a long position can be placed below the pin the bar. The strategy can eliminate a lot of premature exits from trades.
12. Pivot based stop.
The pivot based stop-loss strategy is quite common among traders. As per this strategy, a stop-loss order is placed a little above the pivot price after entering a short position. Similarly, a stop-loss order is placed a little below the pivot price after entering a long position. The pivot price point serves as a visual indicator of trend change. Thus, it can be a highly a reliable tool for placing perfect stop-loss orders. The problem is in determining a proper method for calculating pivot point location – there many ways to calculate a pivot point and they often provide contradicting results.
The strategies discussed above have withstood the test of time. However, it should be remembered that the best strategy for a particular scenario can be chosen only through experience. You can learn more about various trading strategies that involve their own stop-loss placement techniques on our website: earnforex/forex-strategy/
About Author.
I respect market vollatility and i have still about 150 point stop loss.
Do you just set it to 150 points for any currency pair or any timeframe? How is it working for you?
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Daily Chart Trading Strategies.
You should notice a pattern in my evolution as a trader. My manual trading experiences have been moving up the time frames, even though I got into trading because of forex robots. First, I tried scalping on the lower time frames, then day trading on the H1 and H4 time frames. Since I hadn’t really been able to find a way to fit trading into my lifestyle, my next stop was the daily time frames.
Daily Chart Trading.
I thought trading the daily time frames was only for big players with large trading accounts. I thought this because on the daily time frame you need to use a larger stop loss than on the lower time frames. I just couldn’t wrap my head around the fact that you can be just as profitable trading the daily charts. Then, when I learned more about money management, I understood how this type of trading can be traded for nice profits on a smaller account.
When you are on the lower time frames you can use a tighter stop. This means that price does not have to go that far in your favor to pick up some nice profits. Price also does not have to move that far for substantial losses as well.
The higher time frame’s price needs to move more to get the same results. While you usually end up placing less trades than you would on the lower time frames, the setups are stronger and can be just as profitable over the long run. You do need to have patience in both waiting for the right setup and letting the trade develop once you get into the market.
Basically, I was drawn to trading strategies where I looked for trade setups once a day, at the close of the daily candle. This made things simple and quick because I only had to make a decision once a day and actually had the time to look at the charts and decide if this was a setup I wanted to trade. On the lower time frames, things happen a lot faster and you have to make a quick decision.
Due to my experiences with day trading, I already had some trading tools built that I could use with the daily chart strategies. I particularly liked using a Trade Management EA to manage the trade after it was placed. I would place the trade, set up the Trade Management EA to move the stop to breakeven, take partial profits or lock in profits, and I was done for the day.
Example Daily Chart Strategies.
Here are a couple of examples of systems I use to trade the daily charts. I think you can see the potential here for profits.
A daily chart for EURUSD.
EUR/AUD daily chart.
So, was trading the Daily charts the end of my Forex trading journey?
Well, not really. You see, while trading the Daily charts has a lot of what I want in a trading system, I still was not satisfied with it. Quite frankly, it can be a little boring and you still have to be very disciplined to trade this way. You can be in trades for a very long time, going up and down. It can take its toll on you emotionally.
Automating Daily Chart Trading Strategies.
In the beginning of this series, I said that my journey began because of forex trading robots, but that robot development should be the the END of the journey, not the beginning. After going through my scalping and day trading phases, I believe making robots to trade on the daily time frame is for me. The daily time frames are more stable than the lower time frames and the setups are stronger. Making an expert advisor to trade the strategies would allow me to set up the accounts and walk away from them completely.
I know it might sound strange to want to automated a daily time frame strategy that is quite simple to trade. But the truth is, watching the big pip swings up and down bothers me. Using a robot would fix this problem and I’m sure some years would be very profitable trading these strategies.
Entry and Exit Rules.
Moving Average: Simple – Close Period 3 Shift 3.
The rules: Enter when the candle crosses and closes on other side of MA and RSI is already crossed above the 50 line. Exit when the EMAs cross in the opposite direction.
Basically, this is a 3/5 EMA crossover with an RSI filter.
In the mean time, tell me what you think about swing trading or trading off the Daily time frames. Have you thought about automating a Daily time frame strategy before?
Really enjoying your series of blogs, particularly because you’re relating your own real-life experience in Forex trading. I also started with building my own EA’s, and now a year later I a came to the same realization that one should be a competent manual trader before automating your strategies. I also don’t have time to trade during the day, so I am busy looking for decent strategies that only requires attention once a day, with the option of automating parts of it (the programming part is easy, its coming up with solid strategies that is difficult!)
Really enjoying these articles. I am at exactly the same stage after a year. Currently working on programming a few long term strategies.
Roy Peters says.
I enjoy trading the daily timeframe. I may look into robots in the future but for now I like the fact I can make decisions without too much stress on the lower time frames.