Free Forex Education

SL Orders based on Important Levels and Market Behavior

This approach is the most effective and objective when it is properly applied.

The stop loss order is placed away from important levels (HOPS, LOPS, PP, etc.), giving the market some room to reject the price from that level.

[Chart 1]

At the chart above, the market is bouncing off two important levels, the pivot point (red line) and an important resistance line (black line). The market is trading above the PP so it is safe to make long trades.

A good stop loss order level would be placed at 1.4073 near the horizontal blue line, below both important levels plus a little more room (in case the market behaves a little wilder than usual). As seen on the chart, the price went a little above then below both important levels before moving up quickly; it is called normal fluctuations (false breaks). However, if the market makes a sustained break below these levels (below 1.4080) then we want to be out of the market as soon as possible before the market goes any further. At that point the probabilities of success decrease dramatically.

Placing stop loss orders at important levels is a commonly made mistake. Remember at those levels traders tend to react emotionally making price fluctuations a little wilder than usual. Therefore, it is a good idea to give the trade some room to work out.

To summarize, the stop loss should be set in a place we no longer want to be in the position. If we enter a long position, and there is an important support level, then we set the stop loss order below the support because if the market breaks such important level, the odds are that the market will reach lower levels.

The stop loss order could also be placed below/above a trendline, Fibonacci retracement level or any other important level.

We could even get better results by making up a hybrid approach of these two methodologies.

On the example above, if we entered a short trade at 1.4087, the stop loss level based on important levels would be set at 1.4073, 14 pips away from our entry point.