This article is about a problem every trader encounters. It can occur regardless of the chosen market or financial instrument.
I’m talking about the situation when the price triggers your stop-loss. Is it possible to mitigate the risks of that happening or should we accept it as unavoidable? Let’s try to find out.
Let’s be clear – we are not fans of conspiracy theories about greedy and cunning market-makers, that fool the crowd by moving the price in this or that direction.
Sometimes there are news reports that the government imposed fines on transnational banks that had broken the law. Usually it ends with a settlement, the banks pay tens, or sometimes hundreds of millions of dollars and the case is closed without any public scandal.
Such reports give grounds to believe that there are some price and stocks manipulations. The banks simply accept they are guilty as charged if caught red-handed. Besides, the profit from these unlawful practices is in worst case equal to the size of fine – often the profit is much higher.
Horizon trading strategy allows you to notice the actions of big market participants. These actions have impact on the price chart, and all you have to do to get profit is to follow the big actor.
If you learn to read charts properly with Horizon TS, your profit at Forex will be certain.
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Right and wrong questions
I, as a trader, do not care who wants to move the price and whereto. Whether it’s John Doe the Market God, Dow Jones, or my neighbour across the street – it doesn’t matter.
The important thing is how to trade this movement profitably, regardless of who initiated it – the market makers, the crowd or both.
And how to place stop so that the price won’t trigger them. In mathematics they say that a well-stated question is half an answer.
In his book “Trading Chaos”, Bill Williams describes a classical stop-loss trigger algorithm. They open an order and place the stop too close, say 10-20 pips.
The price triggers this stop with a single move and goes on trending in the predicted direction, as if mocking the poor trader.
The loss is small, but very disappointing. The trader concludes that placing stops too close is risky, and next time they place it much further, 100 or even 200 pips away.
This time he won’t take the bait. The price slowly creeps to his distant stop, triggers it and trends against the original trade.
The trader gets significant losses, takes anti-depressants and swears not to place stops so far. They place stops too close again and the situation repeats. It is a vicious circle.
Is there a middle ground?
I believe that the question is wrong. And you can’t give the right answer if the question is wrong to begin with. There are no strict laws or working templates in the market that provide regular profit. Or else they would have been already discovered by millions of quite intelligent people, who monitor the market. And they would have turned into millions of intelligent millionaires abnd billionaires.
Should I place stops close or far, so that the price does not trigger them?
What market are we talking about:
- Trending calm
- Trending volatile
- Flatting calm
- Flatting volatile
Depending on the market you can get 4 different answers. What are you open positions sizes? What instrument are you trading and when - is it 10-year bonds or a GBP right before Brexit?
The number of possible answers increases exponentially – there can be dozens and hundreds. Every market situation has its own unique solution.
Nevertheless, there are some general rules, that allow to minimise losses. Let’s see where the market crowd likes to place stops.
And the answer is – where it suits them. Modern people like comfort and clarity in all things, and it often fails, because market implies acting in time of uncertainty.
- Wave theory adepts place stops after the supposed swing wave.
- Support/resistance adherents will place them slightly above resistance or slightly below support.
- Those who track daily, weekly and monthly high and lows will place them just above the highs or just below the lows.
- People who like marking patterns, trend lines and ranges (that millions more people also notice) place them near these patterns, ranges and lines.
- Round numbers lure stops like moths, as they are psychologically significant. Take the strong 1.24000 support on EURUSD – open the terminal and see for yourself, that the price plunged from this “strong” level for more than 1000 pips. No doubt it harvested plenty of stops.
The price is highly likely to trigger all the mentioned stops, making many people lose money, and only a handful will get profit. There is one unbreakable market rule – the crowd must lose.
Avoid obvious actions, don’t be fooled. It is a bad idea to trade predictable in an unpredictable market.
All-time favourate activity of all traders
If you read old books about XIX century financial markets, you will be surprised to know how similar and predictable the market crowd is.
It doesn’t matter if a person uses a telegraph in some backwater American town or looks at six screens with twenty indicators.
Both of them tried to catch a market swing, looking for a “high” or a “low”. And both of them lost more often than not.
The seemed “low” turns out to be the start of a long-long downtrend. And a 100% “high” becomes a launch pad for the price to jump into space.
Recal how Bitcoin traded between 3 and 8 cents. Was 8 cents a “high”? Or maybe $18 000 in December 2017?
I guess you have noticed that stops are placed just above the “high” if people expect the price to fall, or just below the “low”, if they expect it to increase. Remember that actual price movement can go beyond your most daring expectations.
That is why we employ the rule of “Safe” in Horizon TS. Many years of trading and statistics from many traders demonstrated that using this technique makes trading as safe and profitable as it gets. You can learn how to use the “Safe” technique and other Horizon “tricks” from our free Horizon video course.
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3 practical recommendations
- Price Action must not mesmerise and confuse you. Let’s pretend the price is slowly approaching your stop and everything tells you that the trend has obviously changed. Are your hands tied, or did someone forbid you to use your trading terminal? Just close the losing positions earlier and follow the market trend.
- You must have a plan of action for every situation before you enter the trade. You should keep cool to prepare it before you start trading. Don’t create a plan, when your emotions blind your judgement.
- Get rid of the habit of looking for “highs” and “low”. If you don’t do it soon, this habit will get rid of your trading deposit.