Determining Stop Loss And Target With Price Action
If we want to set the trading funds properly, then it is mandatory to determine the level of stop loss and profit target when entering the market. One way to use Price Action.
Stop loss levels and profit targets should be used in forex trading. There are determines the stop loss and target along with the entry time, there is also a set profit target without stop loss or vice versa. Whatever the reason, if we want to apply money management properly, then it is mandatory to determine the stop loss level and profit target when entering the market. Many traders determine the stop loss level and profit targets based on the support level, the resistance level or the psychological level, but many are forecast only.
As an alternative, in this article exemplified how traders using the price action method determine the level of stop loss and profit target. This method is relatively simple and easy to implement. As per the flow in money management, we must think about the magnitude of the risk first before the profit we might get. After determining the stop loss level, then we do a position sizing to determine the lot size (or volume) per trade, then the risk / reward ratio .
Determining Stop Loss Level
Determine the stop loss at the most logical level, meaning the level where our trading signal is no longer valid, in accordance with the trading method we use.For traders using the price action method, stop loss should not always be determined at the nearest support or resistance level, but at the most objective level where the market has considered our trading position is wrong. By sticking to logical and objective concepts, the stop loss stop distance should be set as close as possible to the entry level in order to exit as early as possible if we are wrong position or miscalculated.
Example 1: stop loss level on the pin bar.
In the downtrend picture above, we post the sell position on the bar after the pin bar . The logical and safest stop loss level is a few pips over the tail of the pin bar (if there is no significant resistance level nearby). If the price reverses quickly to the tail of the pin bar and stop loss we hit, meaning that we expect the pin bar to be invalid, can be caused by the absence of support (resistance / moving average) or indeed we are misaligned.
Example 2: the stop loss level on the inside bar.
In the uptrend moves above, we enter the buy position on the bar after the inside bar . As is known inside bar indicates the continuation of trend (trend continuation) . A logical stop loss level is determined by a few pip below the lowest level inside bar.
Example 3: the stop loss level of the pin bar reversal signal.
On the pin bar indicating a trend reversal such as the picture above, the stop loss level can be determined at the pin bar’s lowest level (for downtrend to uptrend as in the example), or the highest pin bar level (from uptrend to downtrend). Can also be taken a few pip below or above the level of his pin reversal bar, depending on the position of the entry.
Example 4: Stop loss level in market conditions ranging (sideways).
We often encounter setup price action that is quite valid on market ranging conditions as in the example picture above. In this case we post a sell position on the bar after the pin bar. Stop loss level we specify in the area outside the trading range, and some pip above the pin bar. For the opposite buy position.
Example 5: the stop loss level in trending market conditions.
In the picture above, there is a downtrend market condition and a fakey bar setup that rejection at resistance level and cause false break for reversal, so that the direction of price movement remains downtrend. For the sell position we open after the fakey bar, the placement of the logical stop loss level is a few pip above the fakey bar’s high (tail) level. For reverse uptrend.
An example of the image above is a break-out condition where the price is indeed penetrating the resistance level indicated by the pin bar and the closing price on the bar thereafter. For a buy position at the entry point we open, the logical stop loss level is between the pin bar price and the pin bar’s lowest price, assuming if the price moves back beyond the pin bar’s lowest level, resulting in a false break, meaning the pin bar not enough valid or break-out that happened is weak. For break-out conditions can sometimes be false breaks so that the stop loss level needs to be tightened.
Note : for pin bars that occur close to the support or resistance levels, should the stop loss level be placed a few pip above or below the resistance or support level because price movements usually break through those levels first before reversing direction.
Determining the Target Level (Take Profit)
In the correct money management rules, the target or exit level is always determined in accordance with the planned risk / reward ratio . However, the target level that we specify must be logical and objective according to market price movement condition. For example as in the figure below, we can still determine the target level up to 2R (2 times the amount of risk in the pip) assuming the minimum price movement will touch the resistance level before reversing direction. To target level above resistance is more risk unless we use trailing stop facility.
In the example image below, there appears to be 2 key support levels that would certainly be strong enough to be penetrated. If we plan a take profit level of 2 times the risk (2R) or more, we can use a trailing stop with a distance of 1R, or manually move the stop loss level by first determining the target level of 1R.This is to anticipate the occurrence of false break at key support level.
If the key support or resistance level is smaller than 1R, we are wiser to choose not to enter the market.
In conclusion, the important thing to note is that we should determine the risk first before the target level we have planned. To determine the level of take profit we should be realistic and objective in accordance with market price movements. It does not matter if our trading account is US $ 100 or US $ 100,000, how to determine the amount of risk and potential target level is the same.