We have already found out that it can be quite dangerous to trade without stop-loss in Forex. We have also managed to define the most popular risk allowance per trade of an average Forex trader. Now it’s time to understand how the traders place their stop-loss orders. There are several types of stop-loss and, while some traders use almost all of them, depending on the current market situation, other traders have a strong preference for one or another of these stop-loss principles:
Support/resistance levels are quite popular both for position entry and for exit. Stop-losses set near such levels usually are quite safe. Unfortunately, they can be abused by institutional Forex market participants who tend to push market to support/resistance levels to catch a wave of triggering stop-losses.
Round numbers serve as the psychological levels of support and resistance and thus are quite similar to those stop-losses.
Fibonacci retracements offer good signals both for profit-taking and loss-stopping. Important Fibonacci levels are .382, .5 and .618.
Set levels from the open price is a very popular type of stop-loss in expert advisors, where stop-loss is set to the entry level with a fixed amount of pips added or subtracted from it. Unfortunately, such stop-loss isn’t adaptable to the current market situation.
Indicator values can serve as viable stop-loss targets, but the quality of such stop-loss depends on the quality of indicator. Parabolic SAR is the classical example indicator that’s perfect for stop-loss setting.
Levels based on volatility (ATR) are the most adaptable stop-loss variant. At the same time, it’s the most difficult-to-use method unless you are automating your trading. Volatility based stop-loss changes depending on the current market liquidity and ability to go for long pips.
Gann levels may be derived from Gann fan, lines or grid. Gann was a nice trader, but you actually have to believe in his theories to trade using his principle of technical analysis.
Pivot points are popular, but too many of pivot point types exist. And the produced stop-loss levels are based more on math than on the market situation.
Channels can be regression channels, channels built with trendlines, channels based on trading sessions, etc. Work good, if you know how to build those channels.
Random is a way to set up your stop-loss levels when you have no time for your regular analysis but urgently need a position with a stop-loss level. Of course, you can develop a system with random stop-losses, but how successful will it be?
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