Examples of Logic Based Stop Loss Placement
In this section of the article, I am going to show you some examples of placing a stop loss based on the logic. The following examples show the best placement of stop loss that can be put in a particular situation. Setting stop loss in such a way gives price a room to breathe and the markets – if goes against your open position – logically hits the stop loss.
Placement of Stop Loss Using Pin Bar Strategy
Using this strategy, after finalising the trend of a currency pair, pin bars are searched to place a stop loss. The primary motive behind seeking the pin bar is that the stop loss is placed 1 to 10 pips above the pin bar (if the market is going bearish) or below (if the markets are going bullish). A stop placed below is also known as a classic stop loss placement. Although there are more advanced ways to point out the stop loss, this is the most basic way. The following chart demonstrates the point:
Placement of Stop Loss Using Counter Trend Price Action
Using the counter trend price action, the stop loss is placed just below or above the low or high made by the environment that signals a trend reversal. The following chart demonstrates how a stop loss is placed below the pin bar that shows a significant trend reversal. When the trend indicates a change from uptrend to downtrend, the stop loss is placed above the pin bar.
Placement of Stop Loss using Inside Bar Trading Strategy
Placing a stop loss using the inside bar strategy is the most logical way. The point of a stop is placed at the high or low of the mother bar. The following chart demonstrates the placement of stop loss using inside bar:
Placement of Stop Loss using Trading Range
While reading a trading range, you often see the wicks of the candle stick bar protruding out of the range. In this case, the stop loss is placed at a point where the wicks are breaking the resistance or support level. The following chart demonstrates how the stop loss is placed at a point where the candle wick is breaking the resistance level.
Placing Stop Loss in a Sideways Market Trend
Many times, you must have seen that the markets, instead of making a downtrend or an uptrend, starts moving sideways which means neither buyers nor sellers are governing the markets. Traders usually ignore this trend, but sometimes a sideways market movement can show lucrative profit signals. In this case, the stop loss is placed at 50% of the consolidation market level. You can see that the stop loss is placed at 50% level in the chart. Well, luckily it is placed on the pin bar. The benefit of placing the point of stop like this is that if the market starts moving in the opposite direction, the breakout will not be that strong. Following is the chart demonstrating a stop loss on a sideways market movement:
Closing Thoughts on Stop Loss
Placing a stop loss on the basis of logic rather than being emotional is the best way. As discussed above, we should place the stop loss at the high or low of the trend, but you can also place it above these key levels. This way you can easily get to know that the market sentiments are changing and the trend is reversing.