What Is A Stop-Loss In Forex Trading? And How Do You Set It?

Let's Talk About Trading Reversals

Let's Talk About Trading Reversals
I feel I could have done much better this week. The retracement of GPJPY on Friday from the 132.15 high got me out of the week at a profit, but I really think I should have done better. I'll spend the whole weekend dissecting my trades and working out where I may have made mistakes and where I can improve upon these.

Part of my reason for joining here was to teach things that work for me, and to learn about things working for others. The best thing for me is for people to provide well thought out and well presented suggestions on ways I can improve upon weaknesses. I've always made my bigger major breakthroughs in trading based on this. Small observations, well explained by people who know what they're talking about.

I've had it said to me many times here that I can not take criticism, but that's not true. I assure you, I'll be 1,000 times more critical of my mistakes that anyone else. I will still be working on them long after others forget them. What I am not interested in is comments I've got here that usually amount to, "You're stupid, and I think I am a better person than you". I'm not here to learn how to be egotistical, I already know how to do that.

In this post I'll discuss how trading reversals, and particularly how I traded shorts on GBPJPY this week. I'll start by doing a run through of the trades I took.
Thing started well, shorting on Monday 129 - 128.25 (Here my sell was stopped out right before it dropped 100 more pips, so I was not happy with this winning trade. I view it as 100 pips loss in some ways).

Then I bought the low of 127 with a 128 target, but took profit and reversed 127.40.

Stopped out this trade, and sold 128.
Stopped out, and sold 128.50.
Stopped out, and decided to stop selling. Worked on a more developed plan in case the market continued to go up.
Bought 130 area, and took profit 131.
131.50 area started selling again, got some stop outs. Sold high 132.15.

All my stops were 10 - 20 pips. Very tight for this pair.

Where I'm going to focus here is 131.50 - 132 area. Getting stopped out for 10 pips when the market goes up 300 more is fine for me. I can work on filtering these trades, but as far as I'm concerned I am losing these well. Someone commented on one my GBPJPY sells signals from 128.50 saying I was "Rekt" when it went to 130 ... but I got out for 15 pips. This is exactly the type of useless "feedback" that's obviously worth ignoring. Hopefully this post can be a more constructive conversation.

So here is where I am starting to sell GBPJPPY and getting spiked out. I call myself out on the mistake I am making.
https://preview.redd.it/g3k0sfndi1l31.png?width=678&format=png&auto=webp&s=dfc6b9c8afeea66a4292301c5b3f143062bf02f7

I then took up my own advice, set some limits. Took some more nominal stop losses for 10 pips or less and got in a good trade 132.15.

https://preview.redd.it/87xbdrhcj1l31.png?width=815&format=png&auto=webp&s=33ca2e15bbe216f9fb3fe1b00e885a1c63aaafea
https://preview.redd.it/4rmiujljj1l31.png?width=758&format=png&auto=webp&s=7103dfefb681d8db748cefd3c6ab0fcae2b5fd2b
Source https://www.reddit.com/Forex/comments/czyoo6/i_think_a_huge_gbpjpy_sell_is_due/ez7any5/

I added to my sell 132, 132.05 and 131.90.

The end result of this was profitable, but I know I can do better. This is one of my known areas of improvement.
I'd be interested in sharing ideas and thoughts with people on how to improve here. These have to be comprehensive, though. Including entries, exits and Rprobability assessments. Saying things that amount to cliches and catchphrases do not help. I've also thought of the obvious things.

Options for Trading Reversals



So now we'll get onto some of the options we have to trade this move, and the risks and rewards we get in each one.
I've covered what I've done here. My risk is I am going to invariably get whipsaw stop outs, have to re-enter a few times and have random people telling me I got "rekt". I can deal with all of these, because I'm getting into RR situations that have 10 - 20 + pay outs with the ways I structure positions, add to winning trades and trail stops. I need to be successful something like 7% of the time doing this, and I am successful more than that. Makes sense, to me.

These are the other ways of trading this I am interested in speaking about.
https://preview.redd.it/namn0aahl1l31.png?width=743&format=png&auto=webp&s=02a972ce8f8f42110fb0a3eccf7122950cda68ba
We'll take them one at a time, and I will explain these setups as I think the people are saying to trade them. If I'm wrong, kindly correct me. I'm just basing this on what people who usually say this give when asked to elaborate (assuming they do).

So here is number one. We wait for a sell signal.

https://preview.redd.it/4x504q3ul1l31.png?width=1342&format=png&auto=webp&s=109a2440bd4a424c1e2577ab3ad69fcc76dd7ccb
What now? How do we enter?
If we enter at the low, we're fair game for stop hunting unless we use the highs. Inside of the swing down leg we can expect price to trade in there, even if it's going to fall more. So if we enter after the signal, we have high stop out probabilities unless above the high. Above the high, we have usually 80 - 100 pip stop.
So it seems this is not offering the same RR if we assume the market does top and then fall 500 pips. It's a less profitable trade, or the same, even accounting for it having higher win rate.
Our second option is to wait for the retrace and limit in. This is a great trade.
https://preview.redd.it/rumv8utfm1l31.png?width=1344&format=png&auto=webp&s=16245690beae9c11d10dc569f1e83e251127db6f
Trouble is, this does not always happen. The retrace is not always predictable. So when we use this method, our reward is good entries, good RR, "confirmed" signal. Our risk is missing a big move. For the highly risk adverse, this is probably ideal, but for those who can take small losses for a big win, this is not optimum.

Our other option is to place sell stops, so we enter into momentum. I've shown the areas for this in red.
https://preview.redd.it/kfyaqwsxm1l31.png?width=1036&format=png&auto=webp&s=b35911a87fe57e2ae1c153d368da2ea905f761c9
We have the same issue on RR. Where to place the stops. Has to be above the high, really. Or we have the same risk of small stop outs we have in my method, but we have a worse price.

Here I've circled all the points these alternative confirmed entry strategies flag up sells.
https://preview.redd.it/1zu6ydkcn1l31.png?width=819&format=png&auto=webp&s=184d17cb15574dccf5aa849b0cac74a36fd42f86
On all occasions using the breakout rules, they enter at almost the worst possible price. On the retrace rules, they enter at good price but lose. My trades have engaged the same levels of this (apart from me stopping selling before the 129 trap). I've lost 10 -20 pips on them, and these other signals generated losses of 60 - 80 pips. Same bets, same levels. 1/4 losses, and 400% more RR per trade.

Could those who have different ways in which they approach these reversals explain their rational for it in the same way I've went through mine here?

1 - What the entry signals is.
2 - Where to enter.
3 - Where to stop.
4 - Applying this to losing signals as well as winners (not cherry picking).

If you do this better than I do, I'd be interested in how you do it and your rational for it.
I'm also interested in well thought out explanations of mistakes I make/areas I can improve, as long as it's comprehensive. I'm not the best I can be. I want to get better. I am very keen to learn where I can. I always deeply consider constructive critics and ideas based on what I do (or things others do).
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How to be an Edgy Trader: Producing Positive Probabilities

After a relatively short time in Forex, most people will have heard of traders using the term "edge". "You have to have an edge", "I gotta protect my edge, man" and so on. What traders mean when they say this is something that gives them a calculated (in their perspective, anyway) reason to believe they should be profitable over enough trades. If this whole concept is completely new to you, read this for simplified explanation [link to add].

How do you actually get an edge, though? What does it mean? How does one goes about "finding their edge"?
I can only speak from a personal perspective on this, I am sure there are many more ways people have edges outside of what I am going to talk about. There will be people who have edges that are outside of my comprehension. They may be able to tell you some far cooler stuff, but I personally decided to focus on entering.

It is not a unique thought, I know. I never tried to trade-mark "enter well" but it is something I have paid particular attention to detail on. Not only how to get areas of the market that by default offer better risk reward (see more on this later in this post), but then how to put them on steroids was dialled in entries allowing for larger lots. Note, this is not to say "larger lots" means "risk everything in your account". You can risk exceptionally little as a percentage doing this, and still have the chance of good gains.

This has been something of a three part process for me. Here is how it has went;

Find areas where price is likely to reverse from where you can quickly know if you are wrong to get out.
This does not have to trend reversals, it is usually better to look for the ends of trend corrections, and enter for a new trend leg reversal. I worked out how to do this reasonably early, I think. Relative to what I have seen from others when they are starting up, I would say I was maybe on the upper end of the bell-curve in being able to broadly identify good support/resistance levels while still quite a newbie.
This might have worked out for me, if it was not for the fact I was really wanting to get tiny stops and would put far too much weight on just the levels I was selecting. Sometimes they were astonishingly accurate, which encouraged me to begin to put too much faith into them. Through this time, I was getting punked a lot in the markets. I would start to buy, get stopped out a few times and then just as I gave up buying, it would make a massive move upwards. This was so frustrating. This went on for a long time, with me constantly trying to make the forecasting of specific levels more accurate, which was what I thought the fix was.
This was a good first step. Although it felt hellish at the time, I can see now that getting a good general grasp of levels price may bounce from, or make significant breakouts through, is a good fundamental skill to have.

Expecting and accounting for spikes. Turning my foe to a friend.

So basically what happened is it got smacked with so many spike outs that I started to look at it as "it will be the place I think, plus a dirty spike" (me and spikes were not on speaking terms, at this point). This part there was a lot of arbitrariness. At the time I probably thought of it as "more art than science", but looking back on it I see while I was focusing on how unfair the spikes were and basically just "fuck you" selling into spikes. This was going a bit better, meh ... well, no this also kind sucked.
At this point I would sometimes get rock'n'roll star entries. This made me feel good. Very clever. I was not actually doing all that well, though. I could just sometimes get the spectacular entry I'd been on the hunt for. So there were times I felt particularly smug and clever during this time, but overall I was still losing. The real bane of this part became targeting. Once I'd got my rock'n'roll star entry, what now? It may sound like a good problem to have, but having risk set for a 5 pips stop and a trade up 25 pips with the potential to drop 100 more presents some serious problems. There is a lot of scope to make mistakes here. Also, even if you do what I would now consider to be the right thing (and clearly so), there is a lot of scope to do the right thing and end up feeling like you screwed up. This was what was getting me mostly in this time. My entries were good enough for me to cover my losses in big winning trades, but I was not managing big winning trades efficiently. On a psychological note, when I'd get these big decisions (having to be made in seconds sometimes) wrong, I would often lose my cool and any sense of actual trading rational.

This time was hard. I felt like what it must feel to be tired climbing a mountain, and find your intended route blocked. You can see the summit right there, but you lack a way to get there. You have already drained so many of your physical and mental resources to get where you are and now it is seriously time to ask yourself is it time to climb back down.
I decided to climb up. Then I fell a bunch of times. Licked my wounds. Fell again. Felt uber sorry for myself, and then finally got a grip and started to climb again.

Specific Entry Strategies

It was someone else who told me, they said something to me and it was really a very simple thing. I think others must have said the same thing to me many times also, but it flew in the face of my general idea of "I want to be selling the end of the spike for best possible entry". I won't go into the details of what it was, but it basically amounted to making me see that not having a predicable and repeatable level to set my stops and targets was preventing me from being able to create an edge, or even if I did; I could not understand what it was.

I started to notice things, that I'd literally watched 1,000s of times happen before and see them as nuisance rather than opportunity. I noticed the levels I'd pick price would often stall at them. Then quickly wick (which was why the "fuck you" selling into spikes worked from time to time). I further noticed that a lot of the times I was getting in at the optimum price (and I was getting rather good at this by now), when I was having big profitable trades come back against me and stop me out at tiny break even profits only to then trend for what would have been $$$, 80% or so of the time it seemed to reverse right off the original level, or close enough anyway. These two things had been killing me. The spike out of my entry level and the retrace of my profits to be slight + break even stop outs (I'd panic and close them before they went bad ... or sometimes, I'd not, and they'd go bad).

I came to see that these two things I'd blamed for being the reason I was losing were actually assets to be within my scope to benefit from. If rather than doing what I was doing and getting full risk on too early, I waited to see if it wicked through, made a convincing move and then retested my original level. If it did, the wick could be my stop loss. This was tiny. This was so much better than selling into the wick and "guesstimating" the stop ... by which of course I mean "fucking it right up".

Practical Chart Examples


https://preview.redd.it/i1551s1z9c821.png?width=1360&format=png&auto=webp&s=acaa7e80f94dfe2ba056833cd8788ba006528387
Let's say on this chart I has hypothetically selected the blue level as my sell level. This is obviously a great level if I can target close to the lows and get it even 40% of the time. My stops are tiny, and my reward is big.

Here is how I'd lose all my money while being fundamentally right here;

In phase one, I am selling 2 bars before the high, where there is the doji sort of candle. I am short, I have sold the top pip and I feel smug. Then I get spiked out. I sell a few other times with same results, then probably switch long to just completely trash my day.

In phase two, I am doing the same kinda thing but I am thinking I have out foxed the market by waiting and I start to sell into big candle breaking out of the doji. Here I have more chance of getting the trade, but often price just presses a bit too far with me being squeezed out at the high.

This chart does not really give a good representation of how things would work in phrase three, because I would be using smaller charts and looking for the signs of price action reversing, and then looking for the spots where I can get in tucking stops behind a close high. Essentially it is just added patience and being more tactical when it comes to entering.

You can see if the pay off for a "normal stop" risk reward trade would be a good one here (probably 1:3 or 1:4), the overall scope for massive profit potential (without massive risk) is humongous. Often this will be decreased because you have to trail up stops and price retraces, but if price trends aggressively, 1:20 sort of risk:reward trades can be found here. 1:10 are a lot more common. 1:5 are somewhat frequent.

Through dedicated study to how to enter and target from these sort of moves, I have gotten to a point where I can hit that 1:5 trade more than 20% of the time. Over long periods of time (assuming markets continue to be as they were), I should expect to break even by getting this 20% win rate, and when times are good, win rates like 40 - 50% lead to extraordinary profits, without extraordinary risks.

This is where I have carved out my edge in trading. It is largely based on the concepts of swings/trends formation, support and resistance and classic reversal patterns. All widely available to learn about. Then I put excessive hours of focus on how to turn that common knowledge into uncommon ability.

A determined person reading this, should be able to go and do that for themselves, based on the information provided here to get them started.

(Disclaimer, it took me YEARS, the roses here have thorns ... I want to reiterate, expect this to take some time. Even with me telling you the mistakes I squandered so much time on and how to hack past them)


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