How to place a stop loss and take profit

where to put stop loss

where to put a stoploss when trading

The one rule that must always be obeyed when opening trades: IT MUST HAVE A STOP LOSS, NO EXCEPTIONS! When you place your stop loss, you place it at a logical price value that you know if breached by the market, the trade setup has failed. This means stop losses are not placed at some random area on the chart, the area must be good enough to protect you if you are wrong and far enough to give room for your trades to run. You should always think about risk before reward and you should be at least two times more focused on risk per trade than you are on reward.

From the picture above, we will cover all scenarios of where to place a stop loss. Starting at number 1. The most logical and safest place to put your stop loss on a pin bar setup as seen at position 1  is just beyond the high or low of the pin bar tail. So, in a downtrend like we see on the picture as the first trend is going down from number 1 is formed, the stop loss would be just above the tail of the pin bar, about 3 to 10 pips above the high of the pin bar tail depending on your risk.


Retracement

When a trade is trending, it will either retraces or pause and form a sideway movement before it continues in the direction of the trend or, we usually have two options, the market will either form a candle stick pattern to give signals that the reversal is about to finish or form continuation pattern like flags and triangles and these consolidation periods typically give rise to large breakouts in the direction of the trend, and these breakout trades can be very lucrative. At point number 2, we see a clear flag been formed, in these retracement, we have two options that we can put our stop loss, either below the lowest pin bar after the brake to the upside or just below the range level and not the pin after the break out to the upside.

Range

We often see high-probability price action setups forming at the boundary of a trading range. In situations like these, we always want to place our stop loss just above the trading range boundary or the high or low of the setup being traded whichever is further out. For example, if we had a pin bar setup at the top of a trading range that was just slightly under the trading range resistance we would want to place our stop a little higher, just outside the resistance of the trading range, rather than just above the pin bar high. In the chart above at number 3, we didn’t have this issue; we had a nice large bearish pin bar protruding from the trading range resistance, so the best placement for the stop loss on that setup is obviously just above the pin bar high.

Stoploss combo

After learning about how to enter trades with candle stick formation, some of the stop loss may depend on the kind of entry one will take in order to ensure we receive adequate protection while maximizing our risk:reward ratio. The picture above, shows how to place a stop at 50% level of the candle stick pattern. this is when you have put a momentum order above the the high or low of your candle stick candle.

The stop loss on the above picture is placed below the low or high of the candle stick pattern. these is when you have chosen to enter using the retracement rule to enter. 

The stoploss is placed below the low of the candle stick or above it after using momentum breakout as your entry

Different ways of taking profit or exiting

Exit Plans

Knowing when to enter the market is one thing, but where to exit is something that can melt a trader’s brain. You would think it is natural human instinct to hold onto a winning trade  but the majority of traders have anxiety attacks when they have trades in profit. You’re thinking what, why? Maybe you’ve experienced this yourself. It’s common for a trader to be fearful about the market turning around on them, and wiping out floating profits in the trade. Ironically, it’s common for traders to be very hopeful about a losing trade, and provide it with ‘everything it needs’ to turn around in their favor. When we think about it, it’s so stupid but for some reason psychologically our minds work in the opposite way they should. Our default settings drive us to:

  • Let losers run
  • Cut winners short

With that kind of money management model, we are lighting fires in our account everyday! This is an inverted fear/greed balance that is ruining trader’s decisions. One thing we can do is make sure we have an exit plan. We are going to go through a few exit strategies or different ways of taking profit in this lesson  so we know exactly what we are doing before hand and don’t let emotions dictate our exit conditions.

Set and forget

One way to manage your trades is to not manage them at all. Sounds irresponsible, but this is a powerful way to remove emotions from your trading. It is the psychological benefit of automation. The set, forget & collect method involves you setting up a trade, and firing off the order complete with a stop loss and take profit level. It’s designed to be hands free from that point onward. You let the market take control, and do the rest of the hard work for you. With set, forget & collect configurations  we like to think of the output of the trade as a binary case. One of two things are going to happen:

  • Your stop loss will be triggered or;
  • Your trade target price will be hit.

It’s as simple as that. By setting and forgetting your trades, you leave it up to the market to take care of the rest of the trade for you. Set, forget & collect should help eliminate those self destructive emotional interventions like.

  • Moving stop loss levels
  • Cutting profits too early
  • Stressing out about counter trade price movements

when looking at the picture above, how many trades do you think you have intervened in? A big problem traders have is they can’t leave trades alone to develop into full profit and actually hit the target level. Traders that mess around with their open trades can cause big problems, especially when price retraces, the picture above shows us that even though all our targets where met, price retrace several times and many people would have went out prematurely. This is a sign of emotional weakness, and like mentioned above  we all this tendency as our default mindset config to start with. With the set, forget and collect strategy you don’t ever touch your trade; the market will exit for you. Plan that trade, set the stop loss and target, and then trade the plan basically do nothing more at this point. Set and forget trading is perfect for those who:

  • Have a full time job
  • Study full time
  • Are stay at home mothers
  • Don’t want to be stuck in front of charts for hours 
  • Have other things you want to do with your time while the trades run automatically. 

By forgetting your trades, you don’t need to be at the trading terminal for hours on end, like those traders who punish themselves by using day trading and scalping strategies. This is very unhealthy, and it’s certainly no way to live your life. Don’t make trading a burden on yourself. The set, forget, and collect methodology is a great way to get yourself away from the computer. Remember when setting up a trade,  try to aim for at least 1:3 risk/reward. Set it, forget it, and hopefully collect on it!

Using a Trailing Stop

For those who don’t know, a trailing stop is a stop loss that will move under certain conditions automatically. Generally, trailing stop losses are set to move up when the market price moves a certain distance away from the stop loss price. The stop loss essentially chases the market from a set distance until the market reverses and triggers the stop loss. Personally I am not big on trailing stops. I believe that the natural movements of the markets can trigger trailing stops too early and deprive the trader from potential profits. I especially don’t believe in the traditional trailing stop by price-stop distance setting. Some traders, however, swear by trailing stops though! If you’re going to trail a stop loss, I recommend that you don’t activate it until the trade is beyond the 2x risk/reward target.

Exit using Ema or Trend line

During trending conditions, the 20 EMA generally acts as the line in the sand or an automatic trend line that price draws as it moves.However one can still draw a manual trendline as long as it is drawn correctly. The trend will generally remain above or below the 20 EMA until the trend starts to destabilize. Therefore a trader could trail their stop manually along the 20 EMA price once he’s entered a trade with an established trend. In the example above, manually moving the stop loss as price makes new higher lows by the 20 EMA or on our manually drawn trendline would have allowed the trader to stay in this trade for the majority of the trend. Only when the two or one of them if you prefer to use only one of them would you have closed if they are completely disrespected by price clearly closing below them atleast by two clear candles

Previous candle high or low

Another way a trader could consider trailing their stops is by trailing them up or down the previous candle’s high/low price. In an uptrend, you could manually trail your stop loss up the previous candle low prices. If the market ever breaches the previous candle low, then you will be stopped out. In a downtrend, it’s the opposite. You could manually trail your stop down the previous candle high, so that whenever the market moves above the previous high, you’re out of the trade. Using the manual trailing stop above the candle high or low technique requires you to always be present especially during the closing of the candle. the stop can only be moved after the candles have closed and a new candle has been opened to avoid immature kickouts, these type of technique is to allow you to the trade  long enough so that you  reach a nice profit target. This technique works well in strong moving markets.

Exit by Candle Close analysis

This method is for the seasoned  traders, who are experienced and confident reading price action movements in the market. Using candle close analysis, a trade exit can be considered if a candle closes as a signal in the opposite direction of your trade. This technique is really suitable for the daily charts but can also be used on lower time frames. At the close of each candle you check the markets to see how the trade is progressing. If there have been any red flags raised on the chart that may imply the market is about to reverse against the trade, the trader could consider taking an exit. Some red flag warning signs are:

  • Large counter signals against your trade
  • Market has accelerated away from mean and is sitting at extreme prices
  • The market is having trouble breaking through a key level

If you come across any of these red flag warning signs, you could reevaluate your position and consider exiting the trade. Or you could consider moving your stop to a safe price level where if you know the market crosses, the trade will be invalidated and you don’t want to be in the trade any longer. This might also be a situation where you could also just move to break even, then go back to the set, forget, collect model.

when looking at the picture, assuming that you entered the trade at resistance level, a good target objective would be the next weekly support level, As you can see from the market that when price reached support, it started printing rejection candles, which was the first sign as a warning to exit if your targets are not met yet. immediately when there is follow through on the rejection candle and the trade looks to turn, one can use this opportunity as a time to secure their profits

Taking Partial Profits

Another way to add flexibility to your trading to allow for adjusting to varying market conditions is to take partial profits on trades. Instead of having to necessarily exit the trade in whole at a particular price level, you may only take a partial profit. Doing this allows for reduced drawdown and risk associated with that particular trade while still allowing you to benefit from additional price movements in your favor, or on the flip side take a lesser hit if the market reverses on you.

The drawback to this method unsurprisingly has got to do with the subjectivity factor again. The thought of not having to entirely square the trade can easily push a less experienced trader to take some off the table possibly too early in the trade, and then having to reap a lower value from the bulk of the move. It may also lead to the trader risking more upfront on the trade knowing a quick partial profit would set off the additional risk taken, obviously discounting the possibility of the trade staying in a drawdown. However, when done strategically to reduce drawdowns this strategy can also be mighty effective.  One way to do this effectively could be to book a partial profit at a price level that you would expect to hold as support or resistance for the price. In the case of a bounce off that level, the partial profit taken will help reduce the drawdown and potentially protect you from the possibility of a full loss.

Regardless of which strategy you choose for taking your profit off the table, much of the wisdom in the decision will result from your own understanding of market dynamics and your individual trading style. A well-informed trader who not only understands the markets but also his or her own trading style is forever in a better position to select his take profit strategy intelligently.