Stop, Stop, Stop!

It is often said that ‘the best Stop is a great entry’, meaning that as soon as you enter the market price moves in the direction of the trade and never goes near your Stop.  This takes time and practice to achieve but is a laudable target to aim for.

I also remember being at an International Traders Conference a few years back and trading live with some top traders and as the novice traders inevitably asked the question ‘Where would you put your Stop?’ you could see the expert’s eyes glaze over!

So to answer that novice’s question and put it to bed, here goes ……

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• Firstly, I recommend always use a Stop Loss to manage your Risk.

• Secondly, it depends upon what strategy you are using and what that requires, which you will, of course, have back tested a thousand times over before trading live. 

• Thirdly, your Stop Loss should be placed just beyond a particular technical level, plus an allowance for the spread, beyond which your trade plan is wrong and you definitely want out.

• Fourthly the size of the required Stop will dictate (along with your account size) your position size.  So if you have a tight Stop your position size can be larger, but if you have a large Stop you will probably have to reduce your position size, so that your risk on any one trade remains fairly constant.

A technical level is above or below a key support or resistance level, beyond a pivot level or a key fib level and so on, but a point beyond which you know your trade was in the wrong direction.  If you can’t manage you risk because the Stop is too big then stand aside and wait for a better setup. If you need help with these concepts then maybe you could benefit from attending our next Forex Mastery 2 Day Workshop in London.

Top Trading Tip: Always use a Stop Loss and place it beyond a technical level (also allowing for spread) and manage your risk by altering your position size to match your Stop size, so that your Risk remains fairly constant for every trade.  If you can’t do that because your Stop is too big, then stand aside and wait for a better set up to occur.

So What is Support and What is Resistance?

Horizontal Support & Resistance occur because of Order Flow.  People (and institutions on their or a company’s behalf) place orders into the market where they think price will turn or they want to take profits, get out of a losing trade or at a price where they wish to exchange one currency for another.

Horizontal Support occurs when there are more Buy orders than Sell orders so the Bulls win the day; horizontal Resistance occurs when there are more Sell orders than Buy orders and the Bears win the day.  Support and Resistance on a chart is nothing more than a visual representation in price and time of Buy (Demand) and Sell (Supply) Order Flow which is real people setting and executing Buy and Sell orders.  This creates horizontal Support and Resistance, nothing more and nothing less.

When price moves up and down in waves in the market the swing highs and swing lows create wicks on candles (fractals) where one can draw trend lines, be they Support trend lines or Resistance trend lines.  Trend lines should be drawn connecting these fractal wicks and should not cut through the body of a candle on a chart.  The next thing to understand is that order flow created the wicks on the candles, which created the fractals and thus diagonal trend lines if drawn correctly are also a representation of Supply and Demand Order flow and thus Support and Resistance.

Top Tip: When looking at your charts think about Supply and Demand and Order Flow and where orders are likely to be placed and consider the use of trend lines alongside horizontal Support & Resistance, it might help with your trade planning and when and when not to pull the trigger.

Copyright Forex-Crazy.com 2011.  All Rights Reserved.

Look Left & Stay Safe!

One of the most basic things a trader needs to learn inside out is how to determine and then use Support & Resistance to plan and execute their trades. 

When we want to cross a road safely we look to our left and right and the order we do that depends on what side of the road traffic drives on.  When trying to plan and execute trades we need to know where key levels of support and resistance are to make sure we don’t get run over by the market.  We are trading the Right Hand Edge of the charts and are not 100% sure what price will do next, so before we look right we must always:

LOOK LEFT

on our charts and identify past significant horizontal support and resistance and trend lines in the timeframes which could  impact upon our intended trade.  Once that is done and marked up on our charts then and only then should we look right, and have a more informed view of likely price action and hopefully stay safe when taking our intended trades.

Top Forex Trading Tip: Often past horizontal support and resistance will create small zones where price may react in the future, also where the bodies of candles actually close can be key levels.

Copyright Forex-Crazy.com 2011.  All Rights Reserved.