We will also look at what is time-basedstop-losses? And trailing stops.
Stop-losses are an essential tool in protecting your trading account. Technical analysis is extensively used for stop-loss placement. We will explore a number of ways in which technical analysis can be used to place a stop-loss.
Support and resistance can show where buying and selling has taken place previously and therefore will show where buying and selling is likely to take place in the future. In other words, by looking at the resistance, you can see the highest price that an asset reaches before traders are starting to sell and the lowest price that an asset reaches before traders are starting to buy.
For instance, if you have found a level of resistance and you are looking to enter into a short position, then you can place the stop-loss on the other side of the resistance level. You should place the stop-loss somewhat above the resistance, because price might pierce through a bit before reversing. Or you may want to enter a long position at a support level, meaning you can then place the stop-loss at the other side of the support level.
Another common method is placing a stop-loss is by using a trend line or channel pattern. Once a channel has been established by the price action, price normally stays within this channel for a while. So you can use either the upper or lower boundaries to place your stop-loss.
Using an example going long
Place the stop-loss below the lower trendline below the last contact point. Again, you might not place the stop-loss directly at the trendline boundary, as price might pierce through a bit before reversing. There are times when moving average acts as support and resistance, similar to horizontal support and resistance levels. Moving averages are sometimes used for entry into the market. So, if you are going long or short using moving averages, the stop-loss can be placed on the other side. A know technique that can be used is a time-basedstop-loss. The concept of this is based on how long a trader is willing to hold a trade? A timeframe is set and after it has elapsed, the position is closed. It is important to know that money management rules will apply. And these rules should be used in conjunction with a predetermined stop-loss and profit-target.
Trailing stops are stop-losses that move in your favor when a trade goes into profit. This means that when you are long and the price goes up a certain predetermined number of pips, you move your stop up. When you are short, you move your stop down, when the price moves down a certain predetermined number of pips.
