Whiteboard Wednesday - 3 Key Steps To Placing Stop Losses In Volatile Markets

By GKFX Team  |  06/04/2017 10:43

1) Pinpoint key levels 
When we say pinpoint key levels we do not mean this as something incredibly complicated. Support and Resistance levels are the cornerstone of Technical Analysis and you can find them by just adding the daily high and daily low to your charts. These then become excellent levels to place your stop losses.

2) Give the market room to breathe 
The biggest mistake when placing stop losses is to put them too close to the market price, we have to give the market room to breathe and we also have to be realistic on your trading plan. If you place your stop too close you will not give your trade the opportunity to be profitable.

3) Remember your risk reward ratio
In Volatile markets, it is important to remember that the moves can happen quicker than you expect, so having your 3/1 or 4/1 risk-reward ratio is very important. It may sound simple but always make sure your upside target is bigger than your risk.

Video Transcript:

Hello and welcome to Whiteboard Wednesday, today we're looking at 3 key steps to placing stop-losses during volatile markets. Volatility is everywhere at the moment, with Brexit, Donald Trump in the White House and the Non-Farm Payrolls coming up, so it's incredibly important that you use the risk management tools in place, the key ones being stop losses. So, we have to make sure we're placing them in the right places by looking at these 3 key steps.

Number 1: Pinpoint the key levels. With technical analysis, it's important to make sure you pinpoint various different levels in the markets, and the easiest way to do so is, every day when you go in and look at your charts, pinpoint the daily high and the daily low as well as the weekly high and the weekly low. They are always key support and resistance levels in the market of any given day, so locating them when you look at your charts is very important. They can also act as key areas for your stop losses and limit orders. Remember, support and resistance levels tell us that the levels that were important in the past will become important again in the future. So, placing your stops and limit orders as well as key support and resistance or daily highs and daily lows is an incredibly efficient way of ensuring you're putting your stop losses in the correct areas of the market.

Number 2: Give the market room to breathe. Now, nobody wants to lose too much on their trades, but if we put our stop losses too close to the market, the volatility will easily mean getting stopped out too early in our trade and it won't give us the opportunity to ride our trade into a profitable area, so make sure you give that stop room to breathe. Don't set it too close to the current market price. The Non-Farm Payroll is a key example of the volatility that you get, sometimes with big moves one way and other times with big moves in the opposite direction. if you have a stop too close to where you enter your position, you'll instantly get stopped out when the market moves, and that doesn't just work within Non-Farm Payrolls, it's at any volatile time in the market. So make sure you give your stops room to breathe and make sure you give the market the opportunity to move in your favour before you get stopped out.

Number 3: Remember your risk:reward ratio. These ratios are incredibly important and they go into the trading plan you create when you start trading, so stick to that trading plan, make sure the risk:reward ratio is showing 3:1, 4:1 if needs be, but ultimately make sure that the risk is always outweighed by the reward you return from your trade. When you place your stops and limit orders within the market, make sure that they are at those appropriate risk levels; don't take too much risk, don't move these orders as the market approaches them; it's hard enough to make money when you trade without moving those various stop-orders when the markets get too volatile. Make sure you have an appropriate risk:reward ratio in place and that they leave you in good stead for when the markets do move in that volatile fashion.