Using Support and Resistance Levels to Place Stop-Losses

08/25/2008 12:00 am EST

Focus: STRATEGIES

S. Wade Hansen

Co-Founder, Profiting with Forex (PFX) and Learning Markets

My favorite method for determining where to set stop-losses is using support and resistance levels. Many investors consider this method of setting stop losses to be too arbitrary to be consistently implemented, but I think using support and resistance levels is much less arbitrary than some of the other methods we will be discussing this week. After all, we all know that price doesn't lie, and when we can identify price levels beyond which traders have been reluctant to move, we have a clear indication that stop-losses set beyond these levels should be relatively safe, provided the trend continues the way we forecast. Of course, you do run the risk of being whipped out of a trade if you set you stop-loss too close using this method, but you run that risk with any stop-loss method you may employ.

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