If there is any topic in all of trading – short term or otherwise – that generates more controversy as to how it should be done, than setting stop loss values, I do not know what it could be.

Ask a dozen traders how they do it and you may get a dozen different answers. Many simply set stop loss at the maximum what they are willing to risk on a given trade. My system may not be perfect, but I assure you it is better than that.

The amount of risk – the initial stop loss value – for a trade must be known BEFORE entering the trade. It is an essential element in determining whether the trade meets the minimum requirements for a trade – which in our case is a profit potential that is at least twice the risk. So my system must have an accurate and reliable way of quickly determining the initial stop loss value.

That is where my support and resistant values (SRVs) become invaluable. I cannot tell you everything required setting a stop loss correctly in this short blog posting, but I can tell you generally what is involved.

First, each type of trade we do – there are several – has a “visual setup” associated with it. That visual setup almost always includes a SRV – and that SRV has a specific price value. The visual pattern on which our trade is based can be broken by price movement against our position – usually just a few ticks from the SRV on which our entry is based.

For example, if the oscillation we expect to trade is projected to hit an SRV and bounce in the opposite direction, we will try to enter the trade about one tick from that SRV – often employing the “market if touched” order entry. Obviously a move beyond that SRV of very few ticks would invalidate our logic of entry, so our stop loss can be about three ticks beyond that SRV value. Entry price of one tick away from the SRV and a stop loss 3 ticks away in the opposite direction means our stop loss is 4 ticks.

With risk at 4 ticks we need a potential oscillation of at least 8 ticks for a minimum trade.

All of this can be visually calculated almost instantly with our method of trading.

The savvy trader knows that there will be some losing trades – but by carefully limiting the amount of loss when the trade goes bad, eventual profit can be achieved by picking only those trades with a high degree of probability of success.

Without our SRVs setting stop losses would be much harder and riskier to determine – probably resulting in greater loss on each losing trade.

Perhaps learning to create and trade off SRVs could improve your short term trading performance. Learn about SRVs in our eBook, See the Music of the Market.


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See the Music of the Market

The unique trading method that is Trading Between the Lines