Stop Losses in Trading: Know When You're Wrong

Summary

In this video, the concept of stop-loss strategies is explored, with a focus on 'protected swings.' The video explains how to identify protected swings by recognizing key levels such as fair value gaps and down-close candles, and how to place invalidations (stop-losses) at these levels. The presenter demonstrates real-world examples, showing how to adjust stop-loss placements to optimize risk-to-reward ratios and manage trades effectively. The importance of continuation and reversal entries is also emphasized, offering viewers insights on how to track trends and make strategic trading decisions.

Takeaways

• 😀 A protected swing involves price reaching into an important level like a fair value gap or a sweep of a low, followed by a close over the series of down-close candles that swept the low.
• 😀 The stop-loss (invalidation) should be placed at the protected swing level if expecting price to trend higher and not return to that low.
• 😀 Risk-to-reward ratios can be adjusted by manipulating the stop-loss, placing it at the body of the candles for quicker returns, but this may lead to being swept out before the trade hits the target.
• 😀 Invalidation strategies may vary depending on the type of PD array used, such as breaker blocks or fair value gaps, but the key is to define where your invalidation point is.
• 😀 A protected swing must meet specific criteria, including closing over a series of down-close candles to form a valid entry point for trading.
• 😀 A valid entry can be made after price reaches into a fair value gap or sweeps a low, and the close over the down-close candles confirms the setup.
• 😀 Continuation entries are often more favorable as they provide better risk-to-reward opportunities compared to reversal entries.
• 😀 If the protected swing does not offer sufficient risk-to-reward (e.g., less than 2R), you may wait for a new protected swing or look for continuation entries.
• 😀 The importance of waiting for confirmation, such as a close over the series of down-close candles or price reaching a fair value gap, is emphasized for validating trades.
• 😀 The model allows for flexibility in adjusting stop-loss placement and choosing between different methods, but the core principle is to trade based on valid protected swings and their invalidation levels.

Q & A

What is a protected swing in trading?

A protected swing is a price movement that reaches into an important level, such as sweeping out a low or into a fair value gap, and then closes over a series of down-close candles that created that level. This closure confirms the swing as protected, allowing traders to place trades based on this level.

Where should I place my stop-loss when trading a protected swing?

The stop-loss should be placed at the level of the protected swing. If you're anticipating price to move higher and not return to the low, the stop-loss is placed on the protected low, or you could adjust it to the body of the candle if the risk-to-reward ratio needs improvement.

How can I manipulate the risk-to-reward ratio when trading a protected swing?

If the desired risk-to-reward is not achievable, you can adjust your stop-loss to the body of the candle, which might give you a quicker 2R (risk-to-reward ratio). However, this comes with the risk that the price might sweep your stop and then hit the target.

What is the significance of the fair value gap in protected swings?

The fair value gap represents a point of interest that can be used to identify areas where price may continue to move. In the context of a protected swing, a fair value gap can be an important level where price reaches and forms a valid entry for continuation.

What does the term 'change in the state of delivery' mean?

A 'change in the state of delivery' refers to a shift in market structure, such as when the price moves from a series of down-close candles to a series of up-close candles. This indicates a change in market sentiment and can signal a potential reversal or continuation in price action.

What should I do if a protected swing does not provide a good risk-to-reward setup?

If the protected swing doesn’t provide a good risk-to-reward ratio, you can look for continuation entries. This typically happens when the price retraces to important levels like a fair value gap or sweeps a low before continuing in the anticipated direction.

How do I identify a new protected swing on lower time frames?

To identify a new protected swing on lower time frames, look for the price to reach into an important level (like a fair value gap or previous low) and then close over the down-close candles. This confirms the formation of a protected swing and a potential entry point.

What is the role of PDAs (price delivery arrays) in determining invalidations?

Different traders may use different PDAs, such as breaker blocks, fair value gaps, or inversions. Your invalidation point will depend on the specific PDA you use. For example, your invalidation might be a close above a breaker block or fair value gap candle. The method you choose determines where to place your stop-loss.

How can I improve my risk-to-reward ratio when the price moves aggressively in the opposite direction?

If the price moves aggressively in the opposite direction, you can adjust your stop-loss to give it more room, especially in markets like oil. This allows you to stay in the trade even if there is a temporary sweep before the price hits your target.

What should I do if I miss a potential entry based on a protected swing?

If you miss a potential entry, you can wait for a continuation entry. This might occur when the price retraces to important levels such as a fair value gap or a sweep of a low, and then you can look for a confirmation like a closure over the down-close candles.