I want to explain to you why we use stop entry orders and how you can use them for better trades. Sounds good? Let’s start.
The advantage of stop entries
Stop entry orders allow you to have a confirmation when price rejects important levels of support or resistance and allows you to youse the rejection for tight stops. Tight stops allow you to trade bigger sizes without increasing your risk in a trade. Assume you trade a $500 account and you want to risk 1% of your account size, which is $5 per trade.
Let’s go for the math! If you use a limit entry you need to set the stop on the next important level which often means wide stops for you because you do not know if price breaks through your entry-level before it may turn into your direction. In this case, you maybe need to set a 50 pip stop. That would allow you to trade a size of 1 CFD contract if 1 pip means $0.1 of value.
What if you could reduce the initial stop by using a stop order when price shows signs of rejection and you use the rejection level as a stop? Assume you reduce your stop by 25 pips. This allows you to double your trade size with the same risk. $5 per trade.
Let’s go a little bit further. What if you manage to have a hit rate by 50% and your average winner is two times your average loss? This means every winner makes you $10 and every loser is $5. In 100 trades you will earn $500 and you will lose $250 resulting in $250 in winnings. Increasing your trade size as we had it in our example would mean additional $250 based on the same hitting rate.
So how can you use these new insights for your trading? Let me show you how you could use it.
How to use stop entries
When we use stop entries we want price rejection. So what are you looking for? We want to see higher volume on rejection candles as well as long wicks that show us price is rejected at an important area. Candlestick patterns are a good indication of price rejection.
So you see long wicks, higher volume and maybe a candlestick pattern. What’s next? If this happens on a daily chart it could look like this:
Your next step is to do the top-down approach and look for interesting levels to break on a lower timeframe. In this case the H4 chart:
You see the rejection and you now found a zone where the price needs to break down. Now your stop order comes into play. Look at the green zone that is the level of interest for you. You are placing your sell stop below that level and your stop loss above the red area. That is exactly how we trade in our Tradimo Premium Forex Channel every day. Orlando is our coach there and sends his exact trade ideas daily via video to you that you learn how to find those spots and how to trade them successfully.