BarroMetrics Views: How Do I Set Stop Levels?
A subscriber to the Forum-Video service asked how I set my stop levels. In my weekly video and daily updates on the EURUSD, I said, “stops above 1.3525”. But how far above was his question.
The best way to answer that is to say that I set stops beyond a level, which if reached, would render the reasons for the trade ‘null and void’. So there are two components to my stop setting:
- A reason for taking a trade and
- A price plus filter. Usually the filter is 10% or 20% of some range.
Take the current EURUSD trade:
Figure 1 shows a potential 5-d Spring Change in Trend pattern which if valid projects prices to a minimum of 1.3848 (18-day swing line change price). Since the current positions were on the basis of a 5-day trend continuation, a confirmed 5-day Spring would negate the reasons for the trade.
So, the next question is: what has to happen for the Spring to be confirmed?
Answer: A bullish-conviction bar above the Primary Buy Zone at 1.3471.
But, a bullish-conviction is not known until the close. If I were to exit on the close of the bar, my positions could be severely under water. On the other hand, a price-stop could easily shake me out and by the end of the day, not provide the conviction-bar I need to see to say that the Spring is confirmed.
So, I have two stops:
- A stop that is elected on the close and
- A price stop which if hit, ought to mean that we’ll see a bullish-conviction bar by day’s end.
In this case, intra-day resistance starts at 1.3525 and ends at 1.3567. So, my stop would be somewhere around those prices plus the filter.
Let’s say, for example, I decided that above 1.3567 would be the place because:
- It is above the bottom of value (natural resistance) and
- the start if the directional move down.
I’d place the stop above that price and ‘x’ points as a filter.
FIGURE 1 EURUSD