In today forex faq, we have a question from one of our fellow readers asking me the below question.
Please kindly help to advise how to set stop loss and take profit.
When the trend is reversing, such as from up to down trend, when should I get out?
Thanks in advance
From your question above, I will divide this into 2 parts, one on the setting of stop loss and target profit and the other is on when to get out when the trend reverses.
Question 1: How to set stop loss and take profit?
There are 2 main ways you can set stop loss and target profit and I am going to share with you here in this post.
a) Fixed Stop Loss & Target Profit
I do not know about the strategy you are using but what I am going to share here is based on the strategy I teach in my FX street university course which is also the strategy I am using to trade everyday.
For all my strategies, there is a fixed stop loss and target profit for them. What I do is I have done back testing for six months on each strategies and based on my recording, I calculate out the best stop loss and target profit which gives me more profitable trades.
Based on that, I will then set the stop loss and target profit as per the reading for all trades taken using the strategy.
You can do the same thing by doing back testing on a demo account for six months for your strategy and you can also find the optimum stop loss and target profit.
b) Set at Major S&R Level
Another way you can set your stop loss and target profit is by using major support and resistance levels that the price respect.
Support and resistance indicators to use
– 200 EMA
If you are going LONG, you will then set the stop loss about 5 pips below a major support level above
If you are going SHORT, you will then set the stop loss about 5 pips above a major resistance level above
A similar tactic can be used for setting take profit
If you are going LONG, then you will set your take profit about 5 pips below a major resistance level
If you are going SHORT, then you will set your take profit about 5 pips above a major support level.
Take the picture below for example, you can see that I have drawn the Fib retracement and extension levels. Lets assume that I enter the trade when the price hits 0.618 major retracement level.
I will set the stop loss as 5 pips below the 0.500 retracement level as it is a major support level which gives us a 15 pips stop loss.
I will then set the target profit 5 pips below the 1.618 extension level as it is a major resistance level which gives us a 45 pips target profit.
This trade is trade with 1:3 risk reward ratio and this is a great way to take.
Although some of you may think that it is a waste as the price continues to move up after the major resistance of 1.618, you need to know that in reality, there are a lot of times where the price reverses quite an amount after hitting the 1.618 level.
In trading, we must not be greedy. You can’t win every single pip in the trade. Just set your target and take it and wait for the next trade.
Question 2: When to get out of trade when the trend is reversing?
To me, this is usually not a problem as I set a stop loss for all my trade. If the trend reverses, I will then let it hit my stop loss and end the trade.
If you did not set a stop loss, then I will say that you are in deep trouble. If it is really this situation, I will suggest that you cut your losses as soon as possible as a reversal of trade can hit your very bad if you stay in it.
I hope that I have answered your question and do feel free to email me if you have any question