44. How Successful Traders Use Indicators to Place Stops

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A lesson on how to incorporate the use of technical indicators when placing stops in the forex, futures, and stock market.

In our last lesson we learned how many successful traders look for entry opportunities which allow them to set their stop so that there are multiple support or resistance points between their entry point and stop level, and few if any support or resistance points between their entry price and their target. In today’s lesson we are going to look at another factor that many traders use when deciding where to place their stops, the use of technical indicators.

As you hopefully remember from watching my previous lessons we have already covered two indicators and gone over specific strategies on how they can be used to set stops which are the Average True Range and the Parabolic SAR. While these indicators were designed specifically to help traders gauge where to place their stops, many of the other indicators which we have looked at using to pick trade entry points can also be used to decide when to exit a trade.

With this in mind the question then becomes, with all the options available how do you choose which indicator if any to look at when deciding when to exit a trade. Which indicator if any you choose to include in your money management strategy for setting stops is going to depend largely on the type of strategy that you are trading. As a general rule however if you use an indicator to signal for example a buy entry on a trade most traders will keep an eye on that same indicator and take into account when that same indicator signals to exit a trade.

As an example of this, lets say that your analysis of the ADX shows that the chart of x is about to start a nice trend and you decide to place a trade on that analysis. Using the knowledge you have gleaned from our lessons on stops so far you also pick a level for your stop which has some nice protection and is close enough that it fits within your two percent loss limit. During this trade however if the ADX which is the indicator you used primarily to enter the trade begins to signal that the trend is weakening and the market is about to range, should you remain in that trade? The answer to that question is going to depend on the strategy and what other things are going on in the market at the time, but I would say at minimum most successful traders would take this into account when deciding whether or not to continue with the position, regardless of whether their stop had been hit or not.

Lastly on this point there is one indicator that so many traders watch that many traders will at least keep an eye on what happens with this indicator and that is the 50 and the 200 day moving average. These indicators are in general thought to be representative of the overall trend in the market and a break above or below these levels and/or a crossing of the 50 day moving average above/below the 200 day moving average is normally seen as significant for a market and as such many traders will take this into account and place their stops accordingly.

As you probably have noticed when thinking about placing stops using indicators, as you don’t know where price is going to be when your indicator signals for a trade exit, you do not have a hard stop in the market, are in the very bad position of not being protected in your trade. This is why, as we have talked about many times in our other lessons, that if this method for setting stops is used it should always be used in conjunction with another method which allows you to set a hard stop and stays within the 2% loss limit rule we have established.

This concept of the stop being a sort of “moving target” is a nice lead in to our next concept and lesson where we are going to be talking about what is known as a trailing stop.

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19 thoughts on “44. How Successful Traders Use Indicators to Place Stops”

  1. Very useful video, and good explanation I used indicators on Vertex system and it is very great and all the results are perfect you have to try it

  2. wow look at the people scamming in here advertising their holy grail of trading systems lmao. also the reason only 5% make it is because only that 5% have the will to keep learning and working for it, also there lots of psychology in this business that most people cant wrap their heads around because they don't take or have the time to understand it. with a good system you can get 3 or 4/10 trades right and have the rest be small losses (money/risk management) and still come up very profitable. however what i will say is that the markets wont get you rich quick, (which in my opinion is another reason only 5% make it because it is a hard pill for newcomers to swallow) usually you have to have lots of capital already in your account to have huge returns from the market. the best traders out there realistically gain about 30% of the capital that's in their account annually. Unless you swing for the fences in which case 8/10 times you'll blow your account and end up here blaming the markets like laton.  If your good $100,000 trading capital nets you $30,000 annually. You gotta learn a PROVEN system, learn enough about psychology to understand the crowd mentality and also be able to discipline yourself to stick with that PROVEN system. Along with doing that most people would need to set aside however much money is left over for them from their jobs and expenses at the end of the month and put it into their trading along with any trading profits generated (that means less indulging in things). this way you compound your money, the more trading capital you have the higher your returns can be IF your good and that all starts with the work required to know a system and be able to be disciplined enough to stick to it.

  3. (1) The 200 MA only trust if it is flat 
    (2) All indicators should be tested historically as some work so so well and not so well on the equities and then may still change but not as likely if you have a long history of working on that investment vehicle .  

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  8. Indicators are ok but you can't rely on them to make you money. As a guide they can help with entries and exits though. Having said that non-lagging indicators can be useful like those I use with bullpips and get great results. That way you are not using out of date information. Google "bullpips" to see what I mean.

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  11. wrong. there is a way to know where the indicator is going to be when it says "stop" and this is because of math. simple huh :p

  12. @laton2010 ah yes that is true, fair enough, I've lost more than I earned.
    So far I've lost about 1000€ and am now as I said at around 500$ ar about 400€.
    Again still got a way to go but I believe I can do and that it is possible.

  13. @laton2010 If you really believe that, so be it but I trade in forex for almost a year now, granted I'm still learning (but aren't we all?) but I'm getting there. In fact for the third week in a row I've made profit. I started with as little as 50$(!) and I'm now on my way to 500$.

  14. @laton2010 and this is exactly the reason why only a handful are succesful. beginners don't believe that they can be succesful as well and either don't try or give up to soon, just believe in yourself and learn. you won't be able to make money in a month or two it takes at least a year if not two.

  15. what I am saying here is that the ADX is rising which would have been happening in realtime if you would have been trading that breakout, you would not have had to look back to see it. Best Regards, Dave

  16. In your example for starbucks, you wouldn't know that the ADX would rise to 40 until you are looking at hindsight.

    With that in mind, how do you see? Breakout of ADX 20?

    The same is for the reversal.

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