Education

How to find a great entry price and reduce your stop size

Placing stops: Mastering trade management and risk control

Trade management is a key skill to grasp and a good entry price will
enable you to reduce your stop size. Entering a stop is simply where you
place an order in the market where you will ‘exit’ the market if your
trade goes against you. You should always, always place a stop level as
soon as you enter a trade.  The benefit of using stops is that it gets
you out of the market instantly. The market can have shocks and
surprises and run for hundreds of points in certain situations. You
never want to be in a trade without a stop if you want to ensure you
keep trading. So, be resolved to put your stop order in straight away,
and preferably as you enter the market.

How to decide on the size of your stop

You
size of stop will depend on a large number of variables. Are you swing
trading? Are you only expecting to be in the trade for 1 day? Are you
basing your trade off the weekly chart? However, as a very rough guide,
when you are day trading, you would usually want to consider a stop of
around 25-50% of the daily average range. The average range of the chart
you are trading can give you a good rough guide as to the size of stop
you should be using.

How your entry price impacts your size of stop loss

Once
you have properly conducted your analysis for your trade (this article
assumes that you have a good fundamental or sentiment bias for your
trade) then you need to look for a key place to enter. Let’s look at an
example. Around the 23 October I was looking to buy Gold. The equity
markets had been tumbling, the Italian budget crisis was in motion, the
US China trade war was bubbling away and Gold had been bought strongly
as investors looked to use it as a safe haven again. I considered that
the time was right to buy Gold. I identified the 100EMA as the place
that I wanted to enter. You can see my entry marked on the chart below
by the small blue arrow just above the 100EMA on October 24. Sure
enough, price moved down to the 100 EMA. I waited to see how price would
react to the level and the rejection confirmed my analysis. I knew I
wanted to enter long. As price returned to the 100EMA again, I entered a
long with a very tight stop. I knew that my entry level was correct and
any further falls down through the 100 EMA would mean that my analysis
was incorrect. The equity markets were continuing to fall and at the
time it was the S&P 500 falling, so I entered with confidence and
made a profit that was more than double what I risked. My stop could be
tight because I entered at the right technical place. Specifically that
was  a place where the 100 EMA and a horizontal support level met. By
looking for key places to enter, you can ensure that your stop is as
small as possible. Obviously, the smaller the stop you can use the
better.Place your stop in a place that you think price should not get to
if you are correct in your analysis. Look for them and then, once you
have found them, use them as your entry prices.

Moving your stops to breakeven

Now, once price moves in the
direction of your trade you know that you can start reducing your risk.
In the trade example above, once price had moved above the 50EMA just
above the entry price and cleared the overhead highs at 1233.00, you
could have considered moving the stop to breakeven. Risk would have been
managed and limited. In certain situations it is also possible to trail
your stop as you move into profit

How a good exit helps you keep profitable

Now,
it won’t matter how cleverly you place your stops if you don’t take
your profit. Make sure that you do actually take your profit. Use an
area just before key technical places as targets. In the trade above
there was an obvious place to take profit and that was at the overhead
highs of 23 October. When I came to my desk on October 25 and saw price
at those highs I took profit. I am very glad I did as I would have
otherwise been taken out at breakeven.

So managing your trades is a developed skill. This article has shown you
that by choosing your entry place wisely, you can limit and reduce your
risk in order to maximise your reward.

ForexLive

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