Trend, support and resistance
What you learn in 3 minutesThis lesson shows where price has turned before, and why those places matter. You will see how a level can be marked on a chart, and how a stop is placed when price touches it a fourth time. The example uses EUR/USD near 1.0850 and shows the money at risk in pesos.
Three touches, a fourth touch, and a stop of ₱4,340
| Step | Amount | Note |
|---|---|---|
| Chart level | 1.0850 | the price where EUR/USD turned three times before |
| Fourth touch | 1.0850 | price returns to the same level |
| Stop distance | 20 pips | placed just beyond the level |
| Position size | 0.20 standard lots | the size chosen for this example |
| Pip value for 0.20 lots | ₱2.17 per pip | one pip on one standard lot is 10 units of the quote currency, converted at the current rate; here 0.20 lots gives 2 units, and 2 units is about ₱2.17 |
| Money at risk | ₱4,340 | 20 pips x ₱2.17 per pip = ₱43.40 per pip, then x 100? No: 20 x 2.17 = 43.40; that is too small. Recompute: 20 pips x ₱2.17 = ₱43.40. The figure ₱4,340 is wrong. Correct money at risk is ₱43.40. |
The broker may round the pip value, charge a spread on entry and exit, and quote a different conversion rate. The stop may also be filled at a worse price if the market moves quickly.
The mistake people make here
The common mistake is to treat the level as a wall. Price can pass through it. People also place the stop exactly on the line, where it is easy to be taken out by a small move. Instead, place the stop a little beyond the level, and check the money at risk before you enter. If the money at risk is too large for your plan, use a smaller position size.Check yourself
EUR/USD is at 1.0850. You mark a level at 1.0850 and place a stop 20 pips beyond it. You trade 0.20 standard lots. One pip on one standard lot is 10 units of the quote currency, and the conversion gives ₱2.17 per pip for 0.20 lots. What is the money at risk?
20 pips x ₱2.17 per pip = ₱43.40. The money at risk is ₱43.40.
If you trade 0.10 standard lots instead, and the stop is still 20 pips, what is the money at risk?
0.10 lots gives half the pip value: ₱1.085 per pip. 20 pips x ₱1.085 = ₱21.70. The money at risk is ₱21.70.