How to Set Stop Losses
Stop placement is a topic that sometimes causes confusion amongst traders. This Price Action article is going to be a complete guide to how to set stop losses for the pin bars, fakey’s , and inside bars. Hopefully this will eliminate any confusion you may have had about this topic and will give you a guide that you can refer back to as you need. Consider this another supplement to the course material. Enjoy.
Setting stop losses on the pin bar setup:
• Standard pin bar stop placement
The “standard” or “normal” stop placement on a pin bar setup is near the high or low of the pin bar tail (depending on the direction you are trading of course). I normally place my stop 5 to 10 pips above the high or 5 to 10 pip below the low. No need to play the game of “how many pips above or below the tail is best?”…just place it at least 5 to 10 pips above or below, either the setup works or it doesn’t, don’t over-analyze it.
Now, placing your stop above the high or below the low is the “default” stop placement, meaning, if you are in doubt, place it there. It’s also the most logical stop placement since you are forcing price to invalidate the setup by violating the high or low.
• 50% pin bar stop placement
When you enter a pin bar at the 50% retrace level, you obviously have to place your stop above the high or below the low, or further out if there’s an obvious level close by. When you enter a pin bar setup on a stop entry on a break of the pin low or high, you have the option of placing your stop near the 50% level of the pin bar, this works especially well on long-tailed pin bars that don’t retrace.
You can think of the 50% level of the pin bar as an “imaginary” pivot area. It can be a stop reference / placement point and also an entry point, depending on how you are trading the pin bar and current market conditions.
Setting stop losses on the fakey setup:
• Standard fakey stop placement
For the fakey setup, the “safest” place to put our stop loss is generally going to be just above the high of the false-break bar or just below the low of the false-break bar (depending on the direction you are trading of course).
• 50% fakey stop placement
Two other options are to place our stop near the 50% level of the false-break bar or near the 50% level of the mother bar. These options give us a little more flexibility; especially on fakey setups with larger mother bars they give us the ability to get a better risk : reward to make the trade setup more practical.
However, if you are placing your stop near the 50% point of the mother bar or false-break, you are better off waiting to enter on a break of the mother bar high or low instead of entering on the inside bar break, this will ensure that momentum is in your favor, which will be important since you don’t have the added “protection” of having your stop above the false-break high or below the false-break low.
Setting stop losses on inside bar setups:
• Standard inside bar stop placement
The safest place to put your stop loss on an inside bar setup is just above the high or below the low of the mother bar. This gives your inside bar setup the most “room to breathe” and forces price to invalidate the setup by moving past the mother bar high or low before stopping you out, if it moves against you.
• 50% inside bar stop placement
You also can place your stop at the 50% level of the mother bar. This gives you the ability to get a good risk : reward but you also sacrifice some of the room to breathe that you have with the standard inside bar stop placement. The 50% inside bar stop placement is best suited for inside bar that are larger in range, for smaller inside bars you will want to use the standard stop placement. Once again, this is obviously a bit of a discretionary decision, but price is a discretionary trading strategy, so you will get better at this over time.
Edited by Nikolai Jenkson