Discover the Best Spots for Stop Loss and Targets
- Placing Stop Loss is the most important thing regarding the risk management
- Making good exits is extremely important too
- Stop Loss placement is also determined by the time frame
- Exit strategy involve deeper understanding of price action
What are Best Spots For Stop Loss and Targets About?
Losing trades can put a lot of negativity on you.
Every time your trade falls through, you may even start feeling guilty. If you feel guilty, you are either failing to make money or failing to build your life around your trading successfully.
Why are Best Spots For Stop Loss and Targets Important For Forex Traders?
It’s always tricky to experience losses – but there is no way to trade without them. Successful trading depends on three major factors:
- profitable trading strategy that suits your style
- money management plan
When it comes to money management, correct placement of stop losses is of utmost importance.
Short Term vs Long Term trading
Both shorter and longer-term trading have different placement for stops and targets. The decision should be yours as it will both define you and your trading mindset. It would seem that the long-term trading approach would be “easier” on a trader as there is always stress when making a correct trading decision.
But having been trading markets for many years, we don’t think one can say that one way is more stressful than the other. The key is to find a style of trading that fits your personality.
The research must be done before trading to have confidence in the method and the given time frame and know what to expect given its characteristics.
Short term trading is when you hold a position for no more than a couple of days, four working days being the most. Mind you. However, these intra-week swing trading positions are not what we call – scalping.
Instead, scalping is holding a position for a couple of minutes, very often less than a minute.
The critical benefit of short term swing trading is that your capital is only at risk for short periods.
Therefore, if you make the wrong decision on a trade, you will know it within a few days or the same week. This, in turn, provides you with the chance to free up the capital that you will use for new trading setups.
What Did We Learn from Best Spots for Stop Loss and Targets?
Trading lower time frames often have lower capital requirements than longer-term trading, usually requiring a sizable amount of money.
When trading short term, you can quickly determine the expected risk/reward profile of a trade. This is because, in short term intraday or intra week swing trading, the profit targets and the risk are both well defined.
When you have such consistency and clarity, it should not be a problem for you to plan where you will enter the trade and exit the transaction, mainly if you use profit stops.
However, short term trading has its disadvantages. First of all, trading in the short term is expensive. Short term traders need to cover high trading costs associated with the short holding period of a trade and potentially frequent entries and exits.
Additionally, proper risk management in short term trading is quite challenging because the best friend or the most dangerous nemesis of short term trading is momentum and volatility. As a short term trader, you need to be reactive to market movements. Therefore, it would be best to learn how to exploit both momentum and volatility to your advantage.
General Rules for Stop Loss and Target Placement
Stops are usually placed 5-10 pips above the last most obvious swing high for short trades. For long trades, stops go 5-10 pips below the most apparent swing low.
Target is placed either on pivot points or significant swing highs and lows. However, we need to differentiate between shorter and longer timeframes to identify stops and targets correctly. Read carefully below.
Stop Loss Placement and Target Placement for Short Term Trades
Shorter Term trades are made on either:
- 1h timeframes
For short term traders, we need to watch swings on one or four times the timeframe higher than the timeframe we trade. So if we trade on a 5m timeframe, we need to follow a 15m timeframe for stop loss and target placement.
Alternatively we can watch 1has the maximum timeframe for stop loss and target placement.
If you place stops and targets on the same timeframe, you are risking so-called “death by thousand cuts”, which means your stops will be triggered often, and it might lead to a margin call.
See the example below for an ideal placement of the stop loss and the target on 5m or 15m timeframes.
Source: GBP/USD 15m, Milton Markets
Source: GBP/USD 1h, Milton Markets
Detailed Info on Discovering The Best Spots for Stop Loss and Targets
Is there a Difference Between Short and Long Term Stop Loss and Target Placement?
During the trading career, we need to differentiate between investing and trading. For us, investing is long term trading, so trading and investing are opposed. I would dare say that long term traders need to put in a certain amount of skill and research to make good long term investment decisions.
When you decide and open a long term trade, you will usually set and forget it. You won’t have any stress in managing or babysitting your trade, let alone the stress of staying up late and waking up early to participate in the market action.
Contrary to short term traders, long term investors observe the future, neglecting current market conditions. Because investing will not reuse the same capital frequently, the ROI is not as high with investing instead of an ROI made by a successful short term trader.
However, drawdowns can be huge, and investors need to pay for overnight swaps much more than short term traders. With long term investing, it seems impossible to make substantial gains in the account in a shorter period.
Longer-Term trades are made on either:
- Weekly timeframes
Contrary to shorter time frames, we don’t need to watch higher timeframes than a timeframe which we trade. So, if we trade a four hour time frame, we only watch four hour for stop loss and target placement.
The same goes for daily or weekly. Keep in mind that swing traders use either four hour and a daily timeframe and rarely trade on a weekly time frame.
See the example below for an ideal placement of the stop loss and the target on four hour or daily timeframes.
Source: NZD/USD Daily, Milton Markets
How Can I Know Which Time Frame is Best for Me?
Before you decide where to place stops and targets, you need to determine what type of trader you want to be. Is your personality fitting your trading style? Try to match it—your psychology with your personality. Then you will find out which timeframe for you is the best.
Correctly placing stops and targets will follow only when you decide on your trading style.