Setting Stop Loss On Your Trade
Avery important price point that one should look for is the stop loss price. The stop loss is the price at which you protect your losses. This is the maximum loss that you are ready to take on a trade. Stop loss is important because it lets you do proper risk management. Without a stop loss on your trade, you risk the chance of losing all your capital on a single trade. This is why you should not enter a trade without deciding on a stop loss price.
Setting a stop loss on a long trade
To enter into a long trade you need to look for a support level. This is where you buy a long trade when the price retraces to that level. The profit target is the nearest resistance level.
The stop loss for his trade has to be placed below the support level. This means that when the trade works in your favor, it goes upwards and towards the resistance level, which is the target price. However if your analysis on this trade is wrong then the price starts to move lower and when it reaches the stop loss price that is placed below the support level, you get out of the trade for a small loss.
Setting the stop loss on a short trade
To take a short trade you need to look at the resistance level. This is where you enter the trade and you short sell the contract. The profit target is the nearest support level. The stop loss needs to be placed above the resistance level.
This means that if your analysis is right then the price will move lower from the resistance level and hit the support level thus ending the trade in a profit. However, if the trade does do not move in the expected direction and instead of moving lower it starts to move higher then the stop loss price gets hit and you get out of the trade for a small loss.
How to keep the stop loss
There are various methods used by traders to place a stop loss. The commonly used method is to use the Average True Range. The stop loss is placed one ATR below the support level in the case of a long trade and one ATRabove the resistance level in the case of a short trade. Read the full report on ATR here.