Experiences in forex trading, by a special way.

November 14, 2022

How To Set Stop Loss And Take Profit In Forex Trading

Today I will share about how to set Stop Loss and Take Profit correctly, from the perspective of Technical Analysis.

The first thing to remember when placing Stop Loss (SL) and Take Profit (TP) is: Which time frame (TF) you trade, then set SL and TP based on that TF.

And the way to set SL and TP according to my method is very simple, it is in 2 words: TOP - BOTTOM.

Here are the details of the order entry process, with the roles of SL and TP:

- Define your main trading timeframe.

- Use your system to recognize a forex signal when it appears.

- Determine the closest TOPS and BOTTOMS, compared to the expected entry point.

- Add/subtract the spread and amortize the extra noise of the price.

- Provide SL and TP prices.

- Calculate the ratio of RISK : REWARD of the order (R:R ratio).

- If you accept the ratio R: R, you will enter the order.

- If we do not accept the R:R ratio, we will give up our intention to enter the order and look for another opportunity.

Thus, the selection of SL and TP points will determine whether to enter an order or not, on the basis of the R:R ratio. Therefore, SL and TP are very important, and placing SL and TP needs to be accurate.

Why choose the TOP - BOTTOM method to place SL and TP:

- Top and Bottom are support and resistance levels, it contains technical elements (price charts).

- Tops and Bottoms are also often psychological support/resistance levels.

- Tops and Bottoms represent the wave amplitude in a trending market (trending), and the expression of a sideways price zone in a non-trending market (sideway).

- When price breaks out of Tops and Bottoms, a new range is established, and usually the price will move significantly further in the direction of that breakout. Therefore, it is very safe to stop loss there.

- When the price approaches the Top - Bottom area, usually there will be a reaction (more or less) and will bounce back. Therefore, taking profits in that area is also very safe.

- Every method has errors, this method is no exception, but the error rate is the lowest I've ever known. You can experience this method, if it is suitable, then apply it, if not, consider this as content for reference.

HOW TO SET SL AND TP:

IF BUY:

- SL equals LOW POINT OF BOTTOM minus NOISE.

- TP is equal to HIGH POINT OF TOP minus NOISE.

IF SELL:

- SL equals the HIGHEST POINT OF THE TOP plus the spread plus NOISE.

- TP is equal to LOWEST POINT OF BOTTOM plus spread plus NOISE.

*** Spread: Is the average spread under normal conditions, of the trading currency pair.

*** Noise: Is the estimated spread elasticity due to price fluctuations, or it can be amortization when the broker intentionally "cheats to scan the SL", sometimes it is the volatility when it occurs the "fake breakout".

*** Tops and Bottoms: Are resistance or support levels, in the area closest to the current price.


Usually, I estimate the noise in the TF frames I often trade, namely:

- At M15 about 3-5 pips

- At H1 about 5-10 pips

- At H4 about 10-20 pips

- At D1 about 20-40 pips

...

These levels depend on the currency pair you trade, over time you will learn and come up with a suitable level yourself.

EXPLAIN HOW TO SET SL and TP THROUGH THE FOLLOWING EXAMPLE:

- If after the price makes a peak of 3 and is going down, here you can determine the nearest bottom is 2, and the nearest top is 3, then we will have resistance and support areas, colored in blue as shown in the picture. Note, the AREA needs to reconcile the points (high and low, top and bottom) with each other.

- If after the price creates the top 3, then you enter a BUY order, you have to put the SL below the old bottom at point 2, specifically the SL point to set is 1.16956 minus 10 pips (for example, the noise is 10 pips) will equal 1.16856. The TP will be equal to the top of 1 and 3 minus the noise, i.e. 1.17790 minus 10 pips will be 1.17690. Thus, a BUY order after the price makes a peak of 3 will be TP at 4. If you buy after point 4, you will TP at 5, buy after 5 will TP at 6, and buy after point 6 will get SL in the middle of the 7 and 8.

- If after point 3 you enter a SELL order, you have to place SL on the old top which is the reconciliation point of 1 and 3, specifically the SL point to be set is 1.17790 plus spread (2 pips for example) plus noise (eg. 10 pips) so that would be 1.17910. And TP will be equal to bottom 2 plus spread plus noise, ie 1.16956 plus 2 pips plus 10 pips, so TP is 1.17076. Thus, with a Sell order after point 3, you will not lose SL at 4, at 5 and even at 6, then the order will be TP at 7 (although bottom 7 is higher than bottom 2, but you still TP because you added noise).

NOTES WHEN USING SL AND TP:

- In essence, SL and TP set points do not determine whether the ratio of R:R, R:R is high or low, it is due to your trading system and trading style. The purpose of placing SL and TP is to limit the lowest loss if the judgment is wrong, and maximize the profit if the judgment is correct. At the same time, to avoid cases where the price hits the SL and then turns around, or taking profits too soon,...

- The above way of placing SL and TP is usually correct under normal market conditions. Particularly with the time of news, especially like Non-Farm or FOMC, you need to be careful because there may be SL due to very strong price fluctuations, or it may be because the broker expands the Spread too much. If you hold orders past special news, the noise should be increased.

Above is the method of placing Stop Loss and Take Profit that I am applying, and feel it is the most optimal. Hope the article will be helpful to you. Thank you for reading the article, please share this content if you find it useful for new traders. See you in the next posts.

Best regards,

CaPhiLe.Com

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