If you are following my free forex signals, where would you place your stop loss?
This article is a very quick trading tip for those that are following my price action trading signals.
In here, I will show you the two best places for placing stop loss:
- behind the signal candle
- behind the nearest swing high/low
Defining The Signal Candlestick
But first, what is the Signal Candlestick?
The signal candlestick is the reversal candlestick that you see first and then you place your pending buy stop or sell stop order depending on whether the signal is bullish or bearish signal/trade setup.
- The signal candlestick is NOT the candlestick that activates your pending stop order. That would be the job of the candlestick that forms AFTER the signal candlestick.
- The signal candlestick would be any of these 10 reversal candlestick patterns.
#1: Behind The Signal Candlestick
For example, a sell trendline setup is happening and a bearish harami reversal candlestick pattern forms, then this is what you do:
What if a buy trendline trading setup happens? Do the exact opposite, like this:
If the signal candlestick is a SINGLE candlestick pattern, you have to use the high/low to do what I just showed you in the two charts above.
#2: Placing Stop Loss Behind Nearest Swing Highs/Lows
I would use this options when:
- I think that price is very close to my entry price which means if I placed my stop loss behind the signal candlestick high/low, I may get stopped out prematurely.
- the spread of a currency pair is too large and placing behind the signal candlestick high/low would also get me stopped out prematurely.
Now, here’s an important point: if the swing high/low point is too far away, it is going to reduce my risk:reward and this is based on where I’m thinking to place my profit target within the timeframe I’m trading.
Lets look at this chart below…
- EURUSD has a spread of 4 pips
- and you know that if your pending buy stop order is activated, your stop loss is going to be very close to the market price which means a little move down and you risk being stopped out.
What would you do?
Answer: Look for the nearest swing low.
Swing low is too far….
What would you do?
If The Swing High/Low Is Too Far Away
Here’s what I do if I find that the swing high/low is too far away:
- I just got back to #1 and increase my stop loss distance to a reasonable distance away to avoid having my stop loss near the market price as well as to avoid getting stopped out by the large spreads of some currency pairs.
For Trades Taken On Horizontal Support And Resistance Levels
If you take a trade on a horizontal support or resistance level, placing stop loss is really simple: just place it a few pips outside of the support/resistance level/zone.
Again, you must also consider the:
- spread of the currency pair you are trading
- and how far your stop loss will be if your order is activated. If it is too close, move it a bit further away.
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