Setting Up Stop Loss Orders

Setting Up Stop Loss Orders

Stop loss order levels should be in fact consistent, else they will cost you money. Self-assertive levels are liable to be initiated by the ordinary cycle. 

Base your stop losses on specialized levels, for example, 

• Support/resistance levels, 
• Above and/or below the latest peak/trough, 
• Above and/or below reversal signals; or 
• At the intersection of moving averages. 

Example

This example represents the use of 2 diverse specialized levels for stop losses: 

The primary stop loss is set just below the level of the latest trough. 

The second stop-loss is put below the support line (on a reversal signal above the support line). 

Backing and Resistance Levels 

Avoid from setting your stop loss precisely at the support or resistance level for two reasons: 

1. Trends regularly switch at these levels and you might be stopped out superfluously; 

2. A large number of stops might be set at the support or resistance level, particularly where it has framed at a round number. 

Rather set your stop loss one or two ticks below a support level or one or two ticks above a resistance level. For instance: If a support level has shaped at $20.00, set the stop loss at $19.90 so that you are only stopped out if the support level is penetrated.

3 Day-Trading Technical Analysis Indicator for FOREX, CFD and Stocks

There are lots of technical analysis indicators, it is a complex task to go through them one by one. Hence, many of our readers have asked for recommendations of day trading indicators. 

To get you started with day trading, I suggest these three trading indicators.

1. Donchian Channel
2. Moving Average
3. Stochastic Oscillator

They are simple, easy to understand, and useful for day trading. No, they are not perfect. But they form a nice package to start with.

1. DONCHIAN CHANNEL (BLUE)

Richard Donchian, the pioneer of trend following, invented the Donchian Channel. The channel plots the highest high and lowest low of a specified time period. An average of the two values is also calculated and plotted as the mid-line.

Donchian Channel shows you where the market is now, compared to its past, in a direct and visual way.

The Donchian Channel is useful for day trading as you can use it to keep on eye on the larger time frame. Use a 100-period Donchian Channel to keep you with the longer term trend.

2. MOVING AVERAGE (ORANGE/RED)

A x-period moving average is the average of the past x number of  price closes. As new price bars close, the moving average will move along, dropping the oldest close and including the newest close in its calculation.

The direction of the moving average highlights price trend, and the space between price and the moving average highlights momentum. This simple indicator packs a punch if you know how to use it.

While there are dozens of moving average flavors, start with the simple or exponential moving average with a 20-period setting for day trading.

3. STOCHASTIC OSCILLATOR (LOWER PANEL)

The stochastic oscillator is a popular day trading indicator.

Its working logic is like that of Donchian Channel, in the sense that it measures the current market position relative to the market’s past trading range. However, it assumes that the market is in a trading range and turns that measurement into an oscillator that moves between 0 to 100.

It is useful for finding day trade entries as it is sensitive and responsive. (Use %K-5, %D-3, Smooth-3 for your settings.)

For a multiple time-frame day trading method using stochastic, take a look at Kane’s %K Hooks strategy.

DAY TRADING INDICATORS – A WORD OF CAUTION

You get three indicators. Now it’s time for three warnings against them.

1. Indicators are not perfect, understand when and how to use them.
2. Don’t neglect price action when trading with indicators. Consider using price action patterns to improve your analysis. (Like this simple failure pattern, or the Hikkake pattern.)
3. Do not overwhelm yourself with indicators. Consider the value of every single indicator you add to your chart. Does it add value? Remember to trade simply.

Sources:

http://www.tradingsetupsreview.com/3-practical-day-trading-indicators/

http://www.investopedia.com/terms/d/donchianchannels.asp

http://www.investopedia.com/terms/m/movingaverage.asp

http://www.investopedia.com/terms/s/stochasticoscillator.asp