Technical-focused strategy to survive in the market: Part 4 Finding stop-loss points from price movement [Hiroyuki Tamomukai]
In this series, professional trader Hiroyuki Tamukai will give several lectures focused on trading techniques centered on technical analysis. The theme this time is the indispensable "stop loss" when trading. Let's master how to identify stop-loss points from price movements.
※This article is a reprint and rewrite from FX攻略.com, August 2018 issue. The market information stated in the body may differ from current market conditions, so please be aware.
Hiroyuki Tamukai Profile
Tamukai Hiroyuki. After graduating from university, he attempted professional qualifications but failed. Unable to find employment, he started his own business. During the period of managing the business, he began investing. Currently, after transferring the business, he is a private investor. He also plans and organizes seminars for FX companies. His books include “FX Introduction Even for a Timid Person Can Win” (Ikeda Shoten) and “Steady Profits with Two Chart Checks a Day for the Working FX Trader” (Jiyu Kokuminsha).
Stop Loss for Profit
One of the advantages of technical analysis is that it helps indicate the timing of trades, which is often hard to discern with fundamental analysis. FX trading is a job of narrowing down where to enter and where to exit, so timing for each action is extremely important. In particular, entry timing is something everyone cares about.
As a result, many people who become interested in technical analysis will seek more efficient entry timing. They display various technical indicators on charts to begin trades at the best possible moment and look for ways to maximize profits. However, what is easy to overlook is the idea that "there is one entry, but two exits." The exit to maximize profits, i.e., taking profits, is important, but even more crucial is how precisely one can think through the unfavorable exit of a stop loss, as it can greatly influence total earnings.
Seasoned traders first consider the stop loss. They build strategies by focusing on questions like “What timing can minimize potential loss?” and “If I trade at this timing, how will the stop-loss width be?” Even if win rate is high and profits accumulate, a single large loss can wipe out all previously earned gains. This is what is often called the “gradual win, sudden loss” phenomenon.
When formulating a technical rule or trading strategy suited to you, the key is to identify an appropriate stop-loss point. By examining the exit that is disadvantageous to you and then refining the entry timing, the quality of your trades improves and profits increase. If the stop-loss width is too large, a strategy of deliberately avoiding trades can also be used.
