Technical Indicators For Setting Stop losses In Forex Trading
Some Forex trading indicators are used for setting stop losses taking away the need for traders to perform complex calculations on where to place these orders.
A Forex trading systems trader can also place a stop loss order according to these indicators. Some indicators use mathematical equations to calculate where the order should be set so as to provide an optimal exit. These indicators can be used as the basis for setting stop loss orders. These indicators follow price action of a currency closely and define the boundaries which the currencies should move along in. When the currency moves outside these boundaries it is therefore best to close the open trades as price stops moving in that particular direction.
Some of the Technical indicators that can be used to set stop loss orders are:
Parabolic SAR Indicator
Parabolic SAR is used to set a trailing price stop loss
The Parabolic SAR provides excellent exit points.
In an uptrend, you should close long positions when the price falls below the parabolic SAR
In a downtrend, you should close short positions when the price rises above the parabolic SAR.
If you are long then the price is above the parabolic SAR, the SAR will move up every day, regardless of the direction in which the price is moving. The amount the parabolic SAR moves up depends on the amount that prices moves.
Parabolic SAR - Forex Indicator
Picture of parabolic SAR and how it is used
Bollinger Bands Indicator
Bollinger bands use standard deviation as a measure of volatility. Since standard deviation is a measure of volatility, the bands are self-adjusting meaning they widen during periods of higher volatility and contract during periods of lower volatility.
Bollinger Bands consist of 3 bands designed to encompass the majority of a trading instruments price action. The middle band is a basis for the intermediate-term trend, typically it is a 20-period simple moving average, which also serves as the base for the upper and lower bands. The upper band's and lower band's distance from the middle band is determined by volatility.
Since these bands are used to encompass the trading instrument price action, the bands can be used to set stop losses just outside the area of the bands.
Bollinger Bands Setting Stop Loss Level
Fibonacci Retracement Levels Indicator
Fibonacci retracement levels provide areas of support and resistance, these areas can be used to set stop loss levels.
Fibonacci Retracement level 61.8 % is the most commonly used level for setting stop losses. An order should be set just below 61.8 % Fibonacci retracement level
The 61.8 % retracement level is used to set this orders since its rarely hit.
Fibonacci Indicator Stop Loss Setting at 61.8 % Retracement Level
Fibonacci retracement level 61.8%
Support and Resistance Levels Lines
Support and resistance levels can be used to set stop loss levels where the orders are set jus above or below the support or resistance.
- Buy Trade - Stop Loss set a few pips below the support
Buy Trade - Stop Loss set a few pips below the support
- Sell Trade - Stop Loss set a few pips above the resistance
Sell Trade - Stop Loss set a few pips above the resistance