Rules: Stop Loss and Take Profit for Technical Analysis Figures

Every trader knows about the figures of technical analysis and many use them in their trading. But it turns out that not everyone knows how to trade by them correctly. If there are no problems with the figure definition, its marking etc., many traders, especially beginners, are at a loss as to where to place stop-loss and take-profit orders. Let's try to figure it out by taking the most popular TA figures.

Head and shoulders trend reversal pattern

Technical analysis figure "Head and shoulders" is a reversal pattern and means the end of an uptrend. The mirror figure is an inverted head and shoulders - a sign of the end of the downtrend.

The figure, as it is clear from the name, consists of schematically displayed two "shoulders" and a "head. The defining feature of the figure is the so-called "neck line.

Everything is clear with the entry - we open a sell position when the price breaks the neck line. Where, in that case, should we place Take Profit and Stop Loss?

To set a take profit orderIn this case it is necessary to measure in points the height of the "head" from the "neck line" and, having put this distance from the "neck" downwards, set there the take profit. That's how much the price passes in most cases during the development of the "Head & Shoulders" pattern.

More conservative and cautious traders prefer to set a take profit at a distance of 75% from the "head" height. Undoubtedly, this approach has the right to exist, because it reduces not only profits, but also trading risks.

Reference to set a stop loss order is the level where the peak of the right "shoulder" lies. To it it is necessary to add the size of a spread. This will be the minimum level at which a stop loss order can be placed.

Double Top" trend reversal pattern

Double Top" technical analysis pattern is also a reversal pattern, signaling the end of an uptrend. The mirror pattern "Double Bottom" indicates the end of the downtrend.

It consists of two peaks, defined by the "neck line," of approximately the same height.

Reference to set a take profit order is the height of the figure itself. As we said above, one vertex can be slightly higher/lower than the other. To determine the height of a "Double Top" figure, you must draw a line through the peaks of the vertices and measure the distance in points from the neck line between the peaks to this line.

The minimum level setting a stop loss order is the peak of the higher peak, to which you must add the value of the spread.

The situation with the "Double Bottom" figure is similar, except for the stop loss, when setting it, we do not take into account the spread.

The "Flag" trend continuation pattern

Figure "Flag" occurs during an upward trend. After the rapid growth, which can be conditionally called a "flag handle", the price consolidates for some time in a narrow price range, forming a "flag band". After that the price comes out of the flat and continues the upward movement.

In the case of the "Flag" pattern, the reference point for setting a take profit order is the "handle". Having postponed this distance in points from the upper border of the "band", we will receive the level, at which the Take Profit.

In the case of a stop-loss, you should follow the rules of channel trading - stop loss is placed at some distance (depending on the timeframe) from the opposite border of the "band".

When using the figures of technical analysis in trading, you must remember that the older the timeframe, the less common patterns will be, however, will increase their reliability.

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