Traders always dream of the big trades that they can make which will earn them a nice profit on their account. That is what we are all in the business of trading for.
That said, it is just as important to know when to stop losses on a trade that moves against you. One useful method is to use Fibonacci levels to place your stop-loss.
As much as you might want to avoid the subject of thinking about trading losses, the best traders know that managing risk is the best way to keep themselves in the trading game for a long time. If they bail out of trades that go against them soon enough, then they can minimize losses and keep more of their money working in the markets.
How to Use Fibonacci Levels to Place Your Stop-Loss
One of the most popular indicators for traders to use to figure out where the best trades are is the Fibonacci retracement tool. What this tool seeks to provide is the opportunity to see where potential areas of support and resistance lie within the time frame shown on the chart.
This is to say that the Fibonacci retracement tool can be used to figure out where the best prices are for placing a take-profit or stop-loss order. You will want to pay attention to the specific levels that the Fibonacci tool recommends based on the levels that it presents to you. It might provide just the insights that you need to figure out where your orders need to go.
Place An Order Just Below (or Above) The Next Fibonacci Line
The recommendation for most traders using the Fibonacci lines to inform their trading is that they place their stop-loss orders just above or below (depending on which side of the trade they are on), the Fib lines that they have drawn.
Typically, their Fibonacci line drawings are going to be just slightly off anyway, so placing orders that are just above or just below those lines is a great way to ensure that you bail out at just the right moment.
Besides that, you want to give the pair the chance to bounce off the Fibonacci lines before you decide that it is time to pull out of the trade. It could be that the trade comes all the way to the Fibonacci line before it reverses and starts to move in your direction. If that is the case, then there is no reason not to have a stop-loss order that is a little beyond that line just to be safe.
Place An Order Just Below (or Above) the Most Recent Swing High/Low
Another option for those with a higher appetite for risk anticipating a larger move could target the area above the most recent swing high or low as their stop-loss.
Fibonacci Levels to Place Your Stop-Loss:
Set Stop-Loss Orders Ahead Of Time
The beauty of stop-loss orders is that you can set them ahead of time so that they are in place when the time comes to pull the trigger. You probably want to do this because you don’t want to let your emotions get the best of you and have you talk yourself out of a trade that would have been better. In other words, you don’t want to continue to hold on to the trade you made well beyond your stop-loss point because you get emotionally tied up in it and believe that it is surely going to turn for you any moment.
People lose a lot of money and blow up entire accounts trying to do this.
You can set your stop loss orders ahead of time so you are not tempted to make poor decisions when you get caught up in the moment because of how your trading has gone. You only want to make level-headed decisions, and that means you want to place your stop-loss orders way ahead of when they are actually needed.
Then, and only then, can you feel safe that your trade will be executed in the way you designed it to. Stop-loss orders are orders that you hope never fill, but it is better to have them in place for when a trade works against you than to not have them ready and get dragged along in a losing trade.
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