Although stop losses are sometimes extremely frustrating they are a necessity in trading and prevent traders from suffering large losses. The biggest and most common mistake which prevents traders from succeeding at this business is allowing a loss to run; hoping it will return.
Most use stop losses to protect profits or avoid losses but as we know in trading it pays to think differently. How about using them to open a new position……..
Most stop losses are placed at important technical levels which signify a key change in the trend. The double stop and reverse technique work by closing out one position but immediately opening a new position to capitalise on the new trend reversal. In effect, you are following the market. Remember most amateur traders try and pick tops and bottoms and the majority of their trades are positioned against the flow of price. Professional traders always look to a position with the trend.
Let’s look at an example:
We are short on the market at 10 pounds a point and we have a stop loss at 7000 where we entered to protect our profit. A key technical level. If the market moves down we will make money but if the market reverses back over 7000 we are also positioned to take advantage of the trend reversal. To set the double stop reverse technique we would simply place our stop order to close out 20 pounds. By doing this we close out our initial stake of 10 pounds a point but at the same time, another order for 10 pounds is triggered on the buy side at 7000.
This technique works very well on medium-term trades or ”swing trades” but the technique can also be very effective on day trading systems (such as the 5 min bar system) and wide-ranging market.
As with all new strategies and techniques, it’s always wise to paper trade at first or use low leverage until you are comfortable with the process.