How to Place Stop-Losses When Trading Supply and Demand Zones
Understanding Stop-Loss Placement for Supply and Demand Trading
Stop-loss orders are essential risk management tools that help protect your trading capital. When trading with Supply and Demand zones, proper stop-loss placement can improve your risk-to-reward ratio and protect you from excessive losses.
Supply and Demand zones showing optimal stop-loss placement locations
Calculating Your Stop-Loss Size
Beyond knowing where to place your stop-loss, understanding how to calculate the appropriate size is crucial for maintaining consistent risk management.
The 1% Rule
Many successful traders follow the 1% rule - never risking more than 1% of your total trading capital on a single trade. Here's how to calculate this:
Advanced Stop-Loss Techniques
Trailing Stop-Losses
As your trade moves in your favor, trailing stop-losses can help lock in profits while still allowing the trade room to run. When using supply and demand zones as a guide:
- Consider moving your stop-loss to break-even after price has moved past the opposing zone
- Trail your stop behind newly formed zones in the direction of your trade
- Use the 20-period moving average as a trailing stop for longer-term trades after breaking out of the zone
Example of trailing stop-loss using newly formed Supply and Demand zones
Test Your Knowledge
Question 1:
Which of the following is NOT a recommended location for stop-loss placement when trading supply and demand zones?
Question 2:
According to the 1% rule, if you have a $10,000 account and your stop-loss is $0.50 away from your entry price, what is the maximum position size you should take (in shares)?
Question 3:
When should you consider moving your stop-loss to break-even?