How to Place Stops and Targets like the Pros

Placing stops and targets is an essential part of any trading strategy – it is how you limit risk and take profits in a disciplined fashion. While placing stops and targets is a broad topic, there are certain basic things that you need to think about before you ever execute a trade.

Let’s begin with stops. This is perhaps the most important topic, since this is the way that you prevent large losses. Disciplined traders should spend more time thinking about how to manage risk than capture awards, since a single large loss can wipe out a significant portion of their trading account.

Placing a stop can be a delicate balance. A stop should be placed at the price level where it becomes clear that the trading signal that triggered your trade is no longer valid. Many traders make the mistake of setting their stop too close to the purchase price, not because they are timid but because they want to trade a large position. Never set your stop based on your position – instead, set your stop based on the analysis you have made, and then decide what size of position you want to trade based on that. Otherwise, normal fluctuations may take you out of your position to early. Also, don’t exit your position manually before your stop kicks in because you are scared – only do this if there is clear price action that indicates your trade isn’t going to succeed.

Of course, the actual placement of your stop will depend on your particular trading strategy. For instance, if you are trading pin bars, place your stop 1 to 10 pips above the high of a bearish pin bar in a falling market and reverse the strategy in a rising market – put it just below the low of a bullish pin. Similarly, if you using trading ranges between a lower support level and upper resistance level, put your stop just outside the trading range boundary. Of course, there are as many stop position strategies as there are trading strategies, but the important thing is to use a logical position in each case.

Placing profit targets is often a difficult task, both technically and emotionally. The problem is that none of us want to exit a profitable position when we think that there is more money to be made. However, it is far better to take a reasonable profit rather than lose everything because you have overreached. Your profit target should take into account the amount of risk associated with the trade – if you can’t see your way to making that profit level with the current trading conditions, then you shouldn’t open the position in the first place.

Again, specific profit target positioning depends on the strategy that you are trading. However, the first thing to look at is where a reasonable profit is given the risk in the trade, and then to see out there any barriers such as resistance levels between the current price and that target level. If there are, then don’t execute the trade – don’t kid yourself into thinking that your trade will breakthrough levels and achieve profits if a completely logical look at market conditions says otherwise.