Using Stop Loss correctly | Do not set up Stop Loss in Advance
CONTENT
1 - Reason Why you should not set up Stop Loss Orders in Advance.
2 - The Best way to Use Stop Loss.
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Why you should not add your Stop Loss in Advance?
What is the best way to use Stop Loss?
Market loves to trap to traders, especially weak bulls and bears. Setting up stop loss in advance always creates a level of Micro Support/Resistance. Best way to tackle this problem is to watch the market reaction at the Stop Loss. First test (called Stop Loss Bar) will be obviously like a good Breakout, (you might think it is going up higher but it is not confirmed yet). Wait for the next candle (called Follow Through Bar) to close. The strength of the Stop Loss Bar is defined by the Follow Through Bar. Follow through bar significantly tells how the market is reacting after a key point is tested.
Strength Indicators for Follow Through Bar
1 - Reason Why you should not set up Stop Loss Orders in Advance.
2 - The Best way to Use Stop Loss.
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Why you should not add your Stop Loss in Advance?
- If your stop loss is placed with a right logic then market will respect it. Market will test the stop loss again, giving you the chance to exit out.
- Stop Loss are mostly placed in an area where bulls and bear swap their positions. Bulls will be selling their longs and bears will be buying their shorts at stop loss. Consider it as a Breakout point. Market breaks it and then tests it again in form Pullbacks.
- 80% of the time you will see the stop loss is tested and reversing under 5 bars. Traders who use tight stops just above minor high/lows are trapped to exit from the market.
1- Stop Loss is tested and reverses back to entry direction.
2- Stop Loss is tested with a Breakout in opposite direction and pullback is made to Stop Loss. - When bulls and bear swap their positions, all of the weak bulls and weak bears are out of the market. Only the aggressive bulls and bears are controlling the market.
1 – Aggressive Bulls and Bears
They add more to their position at stop loss area because they are betting on Reversal to Fail and they mitigate their risk by-
a - Exit breakeven on their first entry and profit on their second entry.
b – Exiting Breakeven for first and second entries.
2 – Weak Bulls and Bears
They are mostly beginners and are afraid to risk more. They find more suitable to trade a good risk/reward than high probability trade. They set stop loss near to the previous swing High/Low. Once their stop loss is hunted, they are out of the market. They will only trade when they see confirmation of trend in either direction.
What is the best way to use Stop Loss?
Market loves to trap to traders, especially weak bulls and bears. Setting up stop loss in advance always creates a level of Micro Support/Resistance. Best way to tackle this problem is to watch the market reaction at the Stop Loss. First test (called Stop Loss Bar) will be obviously like a good Breakout, (you might think it is going up higher but it is not confirmed yet). Wait for the next candle (called Follow Through Bar) to close. The strength of the Stop Loss Bar is defined by the Follow Through Bar. Follow through bar significantly tells how the market is reacting after a key point is tested.
Strength Indicators for Follow Through Bar
- If closing as consecutive Bar to the Stop Loss Bar (Bull-Bull or Bear-Bear Candles) with closing on its High and no or small wick on top then likely to see market reversing and better to look to exit out.
- If closing as opposite direction bar to Stop Loss Bar (Bull-Bear or Bear – Bull Candles ) then hold your position and wait for the market to react further. Don’t exit yet. It can be a trap.
- If closing as Doji then don’t exit. Bulls and Bears are balanced. Confusion. If market goes into Tight Trading Range after Doji then expect 50-50 for Bull and Bear Breakout. Follow through bars after a Doji will give you a hint whether to exit or hold the position.
- If you find inside bar irrespective of Bull or Bear then wait for information. Having wicks longer or equal to the size of body, on top for Bull Stop Loss Bar and on Bottom for Bear Stop Loss Bar is a sign of Weakness. Wait for more follow through and then decide to exit or hold.
- If you find follow through bar closing as same of Stop Loss Bar (Bull-Bull and Bear Candles) If it is having wicks on top and bottom with a small body then wait for more information (more candles) market is not confident going above your stop loss yet so a good chance to trap some traders.
NOTE : You are likely to find out that terms I use are not conventional. I use the nomentclature which I find comfortable. You are free to name anything you want. The Logic behing those things matters not the names.
If you find this content useful then do let me know in Comments.
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