We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

Free Trading Guides
EUR/USD
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
GBP/USD
Mixed
USD/JPY
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Bullish
Oil - US Crude
Bearish
Bitcoin
Bearish
More View more
Real Time News
  • CHF Swiss Sep M3 Money Supply YY Actual: 2.6% Previous: 2.7%
  • Yet more #Brexit delay keeps gold underpinned, charts suggest it could gain but fundamental risk appetite will probably decide that. #Crudeoil prices sink on worries about oversupply. https://www.dailyfx.com/forex/market_alert/2019/10/21/Gold-Prices-Find-Support-In-Brexit-Turmoil-US-China-Trade-Uncertainty.html?utm_source=Twitter&utm_medium=Cottle&utm_campaign=twr
  • Join @DavidCottleFX 's #webinar at 4:00 AM ET/8:00 AM GMT for your weekly update on the top Asia Pacific market drivers that traders should watch this week. Register here: https://t.co/HNf3Axw8s5 https://t.co/xApzkcobSR
  • Indices Update: As of 07:00, these are your best and worst performers based on the London trading schedule: US 500: 0.23% Wall Street: 0.20% Germany 30: 0.08% France 40: -0.03% View the performance of all markets via https://www.dailyfx.com/forex-rates#indices https://t.co/fupnm3hipk
  • European Opening Calls from IG: #FTSE 7165 +0.20% #DAX 12666 +0.26% #CAC 5646 +0.18% #MIB 22387 +0.29% #IBEX 9348 +0.20% #STOXX 3588 +0.23% #SA40 49591 +0.16%
  • EUR Germany Sep PPI MM: Actual: 0.1% Forecast: -0.1% Previous: -0.5% YY Actual: -0.1% Forecast: -0.2% Previous: 0.3%
  • Markets believe that the European Central Bank @ecb will ease policy this year. This could be very bad news for the Swiss National Bank, but it’s not clear that it will resort to old remedies. Get your market update from @DavidCottleFX here: https://t.co/jZV0Ytw6Db https://t.co/KXULyswial
  • Japan’s All Industry Activity Index (MoM) (AUG) Actual: 0.0% Est: 0.1% Previous: 0.2% #JPY
  • IG Client Sentiment Update: Our data shows the vast majority of traders in Ripple are long at 96.04%, while traders in Germany 30 are at opposite extremes with 78.78%. See the summary chart below and full details and charts on DailyFX: https://www.dailyfx.com/sentiment https://t.co/cCfWKn4CzA
  • (ASEAN Fundamental Forecast) US Dollar Outlook: MYR, SGD May Fall on CPI. Rupiah to Drop on Cut? #USD $USDMYR $USDSGD $USDIDR - https://www.dailyfx.com/forex/fundamental/article/special_report/2019/10/21/US-Dollar-Outlook-MYR-SGD-May-Fall-on-CPI-Rupiah-to-Drop-on-Cut.html?CHID=9&QPID=917702 https://t.co/3u9AfXqbeN
Becoming a Better Trader: Identifying Logical Stops & Targets

Becoming a Better Trader: Identifying Logical Stops & Targets

2018-01-25 17:21:00
Paul Robinson, Currency Strategist
Share:

There are some basic rules which a trader can use to identify the best spots to place their stops and targets, and they should be used off your analysis, making them logical in nature. Risk/reward, as per usual, should always be at the heart of any trade.

Struggling with confidence, want to learn more about what characteristics successful traders exhibit? Here are two guides for you – “Building Confidence in Trading” & “Traits of a Successful Trader”

Use your analysis to determine stops & targets

The type of analysis or tools one uses to identify trade set-ups should also be used to determine when to exit, whether it is a losing trade (stop-loss) or a profitable trade (target). It doesn’t matter whether it’s simple support/resistance, trend-lines, slope analysis, Fibonacci levels, or any other form of analysis, the point is that you use it objectively.

Stops should be placed beyond support/resistance to avoid getting ‘picked off’

Once you’ve identified a trade set-up and determined the point where the trade is likely to be proven wrong, you want to make sure you place the stop beyond that point. For example, if you enter into a long-trade at support, placing the stop below the support level significantly reduces the risk of becoming stopped out prematurely. For a short, you would place your stop above the level of resistance you’ve identified.

Setting stops prior to those levels significantly increases the odds you will get ‘picked off’. Many traders do this so they can avoid taking a larger loss. The simple solution here, is to reduce trading size to a level which allows you to place the stop in the proper place. Better to have a smaller winner, than a premature loser which eventually runs to your target.

Chart 1 – USD/JPY: Daily (Stop-loss)

usd/jpy stop loss example

The chart above shows USD/JPY putting in a bearish key-reversal bar at resistance then turning lower. The logical spot to place the stop is sufficiently above the high of the candlestick. If price traded above then the reason for taking the trade is invalidated.

Don’t ‘hope’, or used fixed objectives for targets

Just as your stops need to be logical, so should your target(s). You don’t want to impose your will, by saying, “this is how much I want to make on this trade” (hope), determine a fixed objective, i.e. – 50 or 100 pip objective.

By ‘looking to the left’ on the chart, that is to identify prior support or resistance, you can see where the market could potentially stop and reverse. This is a logical approach. For example, if you are long, then you want to identify where there is resistance and a possible point where you want to sell. In reverse, for shorts you would look for support where you may want to cover.

Chart 2 – USD/JPY: Daily (Target)

usd/jpy target example

Using USD/JPY, again, as an example, there was a trade entry and stop identified, but where would the stop be? There is a long-term trend-line running higher, with little price support prior to it, making it a possible stopping point for a decline.

For price patterns (i.e. – Wedges, Head-and-Shoulders, etc.) using a measured move target can help you determine the size of a move to expect. It is based off the height of the pattern, then added or subtracted from the breakout point, depending on whether it is a long or short trade. But keep in mind, this is a projected target and it is still a good idea to use ‘logical’ levels.

For example, a bearish set-up might have a projected move of 300 pips, but major support is 200 pips away. In this case, major support takes precedence when determining the target. Stops should be placed well inside the pattern to avoid a shakeout.

Chart 3 – USD/CAD: 4-hr (Measured Move Target)

usd/cad 4hr measured move target example

In the example above, we can see the measured move target (MMT) exceeds a long-term support line, in which case the technical level takes precedence over the projected target.

It’s also a good idea to exit ahead of key levels, as often times markets will reverse prior to reaching the precise price objective in mind. Buyers often times show up just before support, while sellers show up ahead of resistance.

Using trailing stops to extend a trade. When a market is showing considerable momentum as it moves beyond your initial target, you may want to use a trailing stop on a portion of your position. One approach, for longs, is to exit a position once it closes below the low of the most recent bullish candle.

For shorts, the trailing stop would be initiated on a close above the most recent bearish candle. Typically, if a trend is very strong you won’t see the prior directional bar taken out, and if it does, probability increases that a correction is underway.

Chart 4 – EUR/USD: Daily (Trailing Stop)

eur/usd trailing stop example

In this chart, let’s say you entered on a breakout, and your target was hit, but still thought it could continue to go higher. You could exit part of your position, or more aggressively, none at all, and then wait for a closing candlestick below the low of the prior bullish candlestick. In this example, once the trailing stop was triggered, the euro underwent a consolidation phase (correction).

Make sure you have good risk/reward

Risk/reward is at the heart of any sound trading approach. It’s easier to find quality set-ups with good risk/reward than it is to be right all the time. If good risk/reward ratios are used, you could be wrong more than right and still come out ahead. If you use a risk/reward ratio of ~1:2 or greater, you significantly enhance your probability of a positive overall outcome.

This is done by looking at the price you enter and the distance to your logical stop-loss and distance to your logical profit objective. There may be situations where you want to step aside altogether if risk/reward isn’t asymmetrically in your favor.

Chart 5 – USD/JPY: Daily (Risk/Reward)

usd/jpy stop, target, risk reward example

In the example above, we’ve included all aspects of the trade. The entry on the reversal bar, the stop sufficiently above it, a logical target, and the risk/reward potential for the trade. In this case, it’s a hefty 1:4 ratio, a quite favorable outcome for a winning trade.

For the full conversation and examples, please see the video above…

Past recordings you might be interested in:Creating a Trading Plan; Handling Drawdowns; Risk Management; Analysis, keeping it simple; 6 Mistakes Traders Make; Focusing on the Process; Building Consistency; Classic Chart Patterns, Part I;Classic Chart Patterns, Part II

---Written by Paul Robinson, Market Analyst

To receive Paul’s analysis directly via email – SIGN UP HERE

You can follow Paul on Twitter at @PaulRobinsonFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

News & Analysis at your fingertips.