Futures and forex are both high-leverage margin transactions, and more than 90% of people get wiped out because they do not set stop losses. Setting a stop loss is to control the risk in the account, to withdraw in time in the wrong market to protect the principal, and to have a chance to turn things around by surviving.

Many people ask me, why should I set a profit target? Isn't it good to let profits run? When everyone is red in the eyes, they are thinking about benefits, greater benefits. However, the market also has the possibility to turn around. Therefore, setting a profit target is to help us capture reasonable profits and secure them.

Setting a stop loss is the defense in trading, and setting a profit target is the offense. By setting reasonable stop losses and profit targets, trading can achieve relatively stable profits.

In today's article, I will continue to talk about how to set stop losses and profit targets in combination with the three entry methods mentioned in the previous article. Once you have learned how to enter and exit, you have solved more than half of the problems in trading.

The first method: Fibonacci support + reversal candlestick to set stop loss and profit target

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Setting a stop loss:

In this entry method, you wait for the candlestick to close, confirm that it is a reversal candlestick pattern, and then manually open an order to enter the market. For a long trade, set the stop loss at the lowest point of the candlestick, and for a short trade, set the stop loss at the highest point of the candlestick.

In the picture on the left is an example of a long order. After entering, put the stop loss directly below the hammer candlestick. On the right is a diagram of a short order. Once the engulfing candlestick is formed, open a position to enter the market, and set the stop loss at the high point of the candlestick.Setting of Take Profit:

Setting a profit-to-loss ratio of more than 3:1, with the stop-loss space as the standard, the take-profit space should be three times the stop-loss space.

On the left side of the chart, the long position with the hammer candlestick entry has a stop-loss space of 250 points, and the take-profit is set at 750 points. On the right side, the downward engulfing pattern has a stop-loss space of 200 points, and the take-profit is set at 600 points.

Thus, the stop-loss space multiplied by 3 equals the take-profit space.

Precautions:

(1) The profit-to-loss ratio will be very reasonable, and a ratio of more than 3:1 can be set.

A single candlestick is the smallest element that makes up a trend. For example, a trend may consist of 30 candlestick lines, but we only set the stop-loss for the space of one candlestick line. Therefore, using a reversal candlestick to enter the market usually results in a very reasonable profit-to-loss ratio. Aggressive traders can set a 5:1 ratio or even a higher profit-to-loss ratio.

(2) The rate of consecutive errors is relatively high, and consecutive stop-losses may occur during sideways consolidations.

In the chart's sideways consolidation phase, there will be frequent occurrences of bearish and bullish candlesticks, which can easily form upward or downward engulfing structures. In such situations, entries and stop-losses will occur frequently.But as we mentioned earlier, the profit-to-loss ratio of candlestick reversals is large. Even with a higher rate of consecutive errors, it is possible to achieve profitability in trading.

(3) When setting a stop loss for a short position, pay attention to the spread.

Foreign exchange trading involves spreads, with the buy price being above the sell price. A stop loss order placed for a short position is equivalent to setting a buy order. Since the execution price for a buy order is higher, when placing a stop loss order, it should be placed above the highest price of the candlestick plus the spread. Otherwise, the order may be executed before the price reaches the highest point of the stop loss candlestick.

(3) Typically, the stop loss for engulfing patterns and hammer lines is smaller than that for evening stars.

(4) What should one do if the reversal candlestick is too large, resulting in a large stop loss space after entering the position?

Sometimes the market moves quickly, and the lower shadow or the body of the reversal candlestick is particularly long. In this case, setting the stop loss at the high or low point of the candlestick results in a large stop loss space. A stop loss space that is too large can lead to an unreasonable profit-to-loss ratio.

In my practical experience, the solution is to wait for the market to retrace before entering. For example, if the stop loss space for a reversal candlestick is 1000 points, we patiently wait for the market to retrace by 500 points before entering. This way, the stop loss space is only 500 points, and the profit-to-loss ratio becomes reasonable. However, if the market does not retrace, we abandon the trading opportunity.

(5) Previously, I have also written many articles on the public account (Eight-Digit Garden) analyzing technical patterns, which are very helpful for determining entry and exit points. I recommend everyone to read them in conjunction with this, and I won't elaborate further here.

The second method: ZigZag indicator break entry with stop loss and take profit settings

Setting the stop loss:In this entry method, after the ZigZag indicator retraces to form a pivot point, orders are placed to enter upon breaking through the previous high or low. There are two ways to set a stop loss.

The first method of stop loss:

For long positions, the stop loss is set at the low point of the first upward N-shaped pattern, and for short positions, the stop loss is set at the high point of the first downward N-shaped pattern.

On the left side of the diagram is an illustrative example of the stop loss setting for long positions, and on the right side is the example for short positions. I have marked the stop loss points for both long and short positions in the image, and you can zoom in to take a look.

The second method of stop loss:

For long positions, the stop loss is set below the pivot point formed by the ZigZag indicator, and for short positions, the stop loss is set above the pivot point of the ZigZag indicator. These two points are the "secondary low" and "secondary high" that I have marked in the diagram.

Comparison of the two methods:

The first method of stop loss is more conservative than the second. In the same market segment, the first method allows for a larger stop loss space, which means a higher tolerance for market errors and is less likely to be stopped out in a volatile market. The second method has a smaller stop loss space and a lower tolerance for errors, but once the market trend is established, it can result in a very high profit-to-loss ratio.On the left side of the chart, the first type of stop-loss method has a stop-loss space of 180 points; the second type of stop-loss method has a stop-loss space of 80 points. The market moved up to a maximum of 800 points, assuming an exit at the highest point, the first type of stop-loss method has a profit-loss ratio of 4:1, and the second type of stop-loss method has a profit-loss ratio of 10:1. In this trade, the second type of stop-loss method has an absolute advantage.

Looking at the trade on the right side of the chart, the first type of stop-loss method has a stop-loss space of 120 points, and the second type of stop-loss method has a stop-loss space of 40 points. However, after the bear market moved for a while, it made a deep upward correction. With the second type of stop-loss method, this order would be stopped out, resulting in a loss. With the first method, the stop-loss order can be profitably closed. In this trade, the first type of stop-loss method has more advantage.

Therefore, the first type of stop-loss method has a higher success rate but a lower profit-loss ratio; the second method of stop-loss has a lower success rate but a higher profit-loss ratio.

Setting of take-profit:

Set the take-profit according to the profit-loss ratio, using the stop-loss space as the standard, the take-profit space is a multiple of the stop-loss space. It is recommended to set a profit-loss ratio of more than 3:1 for the first type of stop-loss method, and a profit-loss ratio of more than 5:1 for the second type of stop-loss method.

In the illustration on the left, the first method of stop-loss is used, with a stop-loss space of 180 points and a profit-loss ratio of 3:1, setting a take-profit of 540 points; on the right side of the chart is the second type of stop-loss method, with a smaller stop-loss space, only 80 points, and a profit-loss ratio of 5:1, setting a take-profit of 400 points.

Precautions:(1) In practical application, both methods of stop-loss can be profitable, but they should not be mixed; one must choose one method and strictly adhere to it.

(2) How to choose between the two stop-loss methods? It depends on the trader's style. Conservative traders should opt for the first method, while aggressive traders should choose the second method.

In real combat, I choose the first method for stop-loss because it results in fewer erroneous orders in trading, which is easier to maintain a good trading mentality. A good mentality is essential for better execution.

Third method: Batch entry with stop-loss and take-profit settings

Stop-loss setting:

This entry method follows a left-side trading logic. Enter the market in three batches and set a unified stop-loss position. Use the third order as a reference, and set a fixed stop-loss space above or below this order as the unified stop-loss for all three orders.

Place three orders below the resistance level, near the resistance level, and above the resistance level, which are represented by the three blue horizontal lines in the chart. Additionally, set the unified stop-loss at the position of the red line above.

How to determine the value of the stop-loss setting? It should be based on the market's volatility.

Firstly: Set different spaces for different instruments. In forex trading, gold and crude oil have larger price swings, while forex instruments have smaller ones. The stop-loss space for this method should be adjusted according to the instrument's volatility. For trading gold, crude oil, and instruments with large price swings, set a larger stop-loss. For forex direct trades and instruments with smaller price swings, set a smaller one.Secondly: Different trading cycles should be assigned different spaces, and the larger the time frame, the greater the market fluctuation, which necessitates a larger space for stop-loss orders to form an effective error tolerance rate.

Here are some reference values for you:

- For the 1-hour timeframe, the stop-loss space for gold should be set 400-600 pips above or below the third order.

- For the 1-hour timeframe, the stop-loss space for the British Pound against the US Dollar should be set 250-350 pips above or below the third order.

- For the 1-hour timeframe, the stop-loss space for the Euro against the US Dollar should be set 150-250 pips above or below the third order.

These three instruments have representative volatility levels. If the volatility of the instrument you are trading is closer to any of the above, set your stop-loss according to the volatility of that instrument.

Setting take-profit orders:

Identify key support and resistance levels ahead to close positions. After the order enters the market and the price retraces, locate the obvious support and resistance levels on the chart and set the take-profit orders uniformly near these levels to close positions.

After entering the market with a pending order at a key support level below, set the stop-loss uniformly below the third order. If there is a very obvious resistance level above the order, set the take-profit uniformly near the resistance level. When the market retraces, the order will be taken profit directly.Precautions:

(1) Since it is a left-side trade, the setting of the stop loss must be strict, otherwise in a one-sided market, it may lead to very serious losses.

(2) For rebounds at such key levels, the trading success rate will be relatively high. Do not pursue an excessively high profit-to-loss ratio. Exit in time when reaching the set profit-taking position, and rely on the win rate to make profits.

(3) The support and resistance levels for setting profit-taking should be clearly defined on the chart. It is necessary to identify the exit position before entering the order. You can use resonant support and resistance levels, or add the Fibonacci retracement with 38.2% and 50% as references for profit-taking. In the chart above, the resistance level forms a resonance with the Fibonacci 38.2% retracement.

These three types of exit strategies are common exit logics, and everyone can use them in combination with familiar indicators or trading systems.