One of the questions traders often ask is where they should place their stops when trading classic chart patterns. A classic chart pattern is a Head & Shoulders pattern, a double top, or a symmetrical triangle etc. This article will not go into how to identify these patterns but, instead, will give you an explanation of where to place your stops.

Trading, in some ways, is more about managing your risk than necessarily executing your trade. Management trumps execution and a well-managed trade can make up for a multitude of trading sins. The foundation of that management is a stop placement and the amount of your capital risked.

So here is a little resource to point traders in the right direction:

1. What’s a classic chart pattern?

You can read a list from John J. Murphy’s Technical Analysis of the Financial Markets. If you haven’t got this resource, you should consider getting it.

2. Where to place the stop?

Here is an example of a trade taken on the FTSE 100 chart. The fundamental reason for the trade is a fast vaccine rollout in the UK, post-Brexit optimism, some ground to catch up from a post-COVID-19 slump, and a more upbeat UK GDP outlook. All should support the FTSE 100. Therefore, going with a break of the symmetrical triangle should make sense. This trade was the second bite of the cherry as the first breakout resulted in the stop being hit. However, it does serve to show the three options in stop placement.

  • Underneath the breakout candle
    The pros of this method are that you can keep the risk to the trade very tight and have a larger position size. The cons? More stop-outs, but you can always re-enter.

    • Underneath the low of the candle previous to the breakout candle
      Fewer stop-outs, but smaller position size.

  • Other side of the pattern and ‘manage your trade’
    The least in terms of position size, but the most relaxed in terms of trade management. You can also be a bit pickier on whether you stay in the trade or not. However, too much flexibility can be positive and negative. Yes, you can choose whether to stay in or not, but over-analysis can sometimes lead to paralysis.