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Using Moving Averages to Place Stop-Losses
08/26/2008 12:00 am EST
Many forex investors are uncomfortable trying to identify support and resistance levels on their own. They find themselves examining different price levels and saying, "Well, support could be right here. On the other hand, it might be right here. Then again, it could be right here." If you are someone who doesn't feel comfortable identifying support and resistance, or if you are someone who just doesn't like using arbitrary support and resistance levels to set your stop-losses, don't worry. You have a lot of options available to you.
One option is using a moving average to help you determine a concrete support/resistance level that you can use when determining where to place your stop-loss. Once you have placed your moving average on your chart, you can set your stop-loss just below it if you are long a currency pair, or just above it if you are short a currency pair. Of course, you do have to decide how far above or below to set the stop-loss, and what time frame to use on your moving average, but we'll talk about that in the accompanying video (see link below).
Because moving averages, by definition, follow price movement, using a moving average to help you set your stop-loss is similar to using a trailing stop-loss. The one exception is you have to update your stop-loss manually when using this methodology, while a trailing stop-loss automatically adjusts.
By Wade Hansen of PFXGlobal.com
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