Stop-loss should be used by traders to control losses. People need to place this order properly to avoid becoming the victim of sentimental business mistakes. Investors should use stop-loss consistently so that they cannot be driven by greed or fear. Sometimes, investors are required to set a wider stop-loss, and sometimes tight stop-loss. Four tools are used to place this order properly. The advantages and disadvantages of these tools are given below.
Trendline and Support and Resistance
Many investors used the trendline to place the stop-loss. This is a famous instrument when it comes to stop placement. As a usual support and resistance level, trendlines are applied by many investors and, thus, the self-fulfilling prediction plays into this calculation as well. A trendline-break usually indicates the closing or weakness of a trend. It creates only a signal to have investors stop on the other side of a trendline so that they close their trade when clear value signals are given. The disadvantage is that drawing trendlines can be intuitive sometimes as it’s not often clear if the person should go for the threads or the candle bodies. Hence, experts suggest drawing trendlines linking the value wicks so that they are on the safer side when it comes to stop placement and can ignore wrong signals during untimely volatility prongs.
For traders who trade with the trend, Bollinger bands are the best instrument to use. When the market is in an uptrend, the investor sees that value moves higher near to the outward Bollinger Band. A trend that is losing strength will begin dragging away from the outward band and descend towards the middle band. Keep in mind that the central band is a moving average so it creates the sense that during a trend value pulls away from the average and once the value loses strength, it returns to its average. Thus, trend following investors would set their stop above or under the middle band and follow along with it as the trend moves on. An investor who chooses a more conventional technique would set his or her Forex order outside the opposite outer Bollinger Band. Use this link to get a professional demo account to learn the use of Bollinger bands. Once you become skilled, you can trade easily, like the professional Aussie traders
Investors touch upon on moving averages when they talk about Bollinger Bands. When the value is in a trend, the value drags away from its moving average as the trend expedites. When the trend slows and alters, values will return to the average. The famous moving averages, such as the 50, 100, 200 daily moving averages perform as natural support and resistance. Thus, it can discharge to have them on the businessmen’s charts and place their stops outside of those moving averages. Generally, people do not want to place the stop loss right at a moving average, rather they add some space between the moving average and the Forex order. Investors apply moving averages for their stop loss placement and stop runs are usually the result.
Fibonacci levels also work as support and resistance zone. Thus, the idea of support and resistance stop placement also use in the Fibonacci method. After investors have recognized significant trade opening and also perceived an equitable 1-2 sequence for their Fibonacci instrument, they can apply the speculated levels as stop-loss levels. The downside is that they are not often able to discover a 1-2 sequence, within ranges or early on in a trend. Therefore, applying the Fibonacci method will not work 100% of the time.
These will help traders to set orders properly in different circumstances to limit the risk. So, you should learn about the pros and cons of these indicators.