A lot of traders are good at finding profitable supply and demand zones, but only a few can place their stop loss correctly.
A stop loss is an order that prevents you from losing money when your analysis is wrong. This is a protective order from unnecessary losses that traders use to protect their accounts from getting a margin call.
There is a myth among traders that you should trade without stop losses so that your trades don’t get targeted. Wrong! It’s like saying to a driver to drive a car without a break.
In this article, I will show you exactly how I calculate and place my stop loss orders when trading Supply and Demand in Forex. I will discuss 3 methods in this article, so choose the one that you find easy to implement.
Let’s get started!
Method 1: Using the distal line to place the stop loss
This is the easiest method to place your stop loss order. The method consists of drawing your supply or demand zone, then placing your stop loss order a few pips away from your distal line.
Make sure you take into consideration your spread.
For example, on the chart below we have a demand zone around 1.19050 and 1.19636, our distal line is the 1.19050 level. To place our stop loss order, we simply take the distal line and we add 1 to 3 pips and the spread to get the price level we need for the stop.
Our distal line is at 1.19050, we subtract 3 pips because we are buying (if it is a sell order we will add 3 pips instead) and the spread of 2 pips:
1.19050 – 3 – 2 = 1.19000 which is the stop loss price (blue line).
Method 2: Average True Range Indicator
This method is straight forward, all you have to do is add the Average True Range (ATR) indicator on your chart and use the ATR value to calculate your stop loss order.
On the chart below, we have a supply zone around 0.77264-0.77776 levels. Our entry is at 0.77264 level. To calculate our stop loss order, we look at the ATR indicator that shows a 0.00661 value.
This value means that AUDUSD has a daily range of 66 pips. We need to put our stop loss order 66 pips away to avoid getting stop out.
So here’s how we do it:
Entry price: 0.77264,
Stop loss order = 0.77264 + 0.00661 = 0.77925, and we add the 2 pip spread:
Stop loss order = 0.77925 + 2 = 0.77945 level.
Remember, when we have a buy order we subtract and when we have a sell order we add.
Method 3: ATR percentage using Excel
This method is for traders who use Excel a lot and are comfortable around spreadsheets. If you are beginner, I recommend you stick with the above methods to avoid any confusion or mistakes.
So in this method we are using the historical data of forex pairs to calculate our stop loss orders using ATR percentage.
Step 1: Get the historical data from investing.com
Since we are trading the daily chart, we are getting the daily historical data from the website for AUDUSD: https://www.investing.com/currencies/
Step 2: Calculating ATR percentage
Once we download the data, we open the spreadsheet and we add the following columns: High to Low, Daily ATR.
In High to Low column, we use this formula to calculate the difference between the high price and the low price:
For the Daily ATR column, we use this formula to calculate the Daily ATR %:
Now that we have created our table and calculated our Daily ATR %, we need to calculate the ATR% that we will use in our example.
Since we are trading the daily chart, we want to know the price range within the last 6 days. We can change the numbers of days to accommodate our needs. For example, if you want to use it on a weekly chart, use 12 or 14 days instead.
The formula to calculate the average of 6 days is:
= Average (H2:H7)
This gives us an ATR of 0.92%.
To calculate the stop loss order to use:
Entry price: 0.77264,
Stop loss order = 0.77264 * 0.92% = 0.00710 + 0.77264 = 0.77974,
Here we need to add the spread, let’s assume it’s a 2 pip spread on AUDUSD:
Stop loss order = 0.77994 level.
Now, if we compare method 2 and method 3 we will see that the stop loss levels are pretty close: 0.77945 vs. 0.77994 levels.
To download the Excel spreadsheet used in this example:
Trading forex using stop loss orders is a must. Traders need to protect their capitals at all time.
To avoid getting stopped out by market volatility, use one of the methods I discussed above to calculate the right stop loss for your position.