Stop Loss for a Crossover Strategy

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Stop Loss for a Crossover Strategy

Postby George FXtrades » Tue Nov 17, 2009 9:11 am

Hello Edward,

Stop Loss for a Crossover Strategy

Greetings, and a good day to you.

Thank you for all the suggestions and opinions expressed over the enquiries I posted earlier.

The question of where, and how far should the STOP LOSS be, is an important issue for newbies and myself.

It is common knowledge that a STOP LOSS is designed to limit a trader’s loss position while trading a currency pair within a volatile Forex environment.

As many trading Gurus recognize (practically), STOP LOSS should be below the Support level we trade on, or above the Resistance. Therefore, if price breaks these levels, the trade had failed, and STOP LOSS should be around these levels to do the necessary.

My question about setting a STOP LOSS order is how tightly should I set them, in other words, how close to the price where I entered the position or, how close to the current price for a trailing stop loss order. Question is HOW CLOSE IS CLOSE ?

However, I should also be careful not to place the STOP LOSS too close to the opening position(s), particularly in unknown short-term market territory, giving position(s) the chance to breathe.

Secondly, it is the consideration of RISK : REWARD Ratio for any trade entered. If the risk is to my disadvantage, it is pointless committing the trade. Hence, I may have to set a STOP LOSS of 10 pips, and also aim for > 10 pips profit from each trade. Would 10 pips be too tight for a trending market situation ?

Therefore, I require a win ratio of over 50% to be profitable. In spite of this, one approach is to lower the STOP LOSS in order to 'increase' the RISK : REWARD Ratio. On the other hand, it does not change the real risk for the trade, as STOP LOSS has only one logical place, which is either below Support or above Resistance.

Scalping is different ball game

My suggestion for the optimum STOP LOSS level should be at a point where I can safely say that my initial entry has gone against me, and it is time to get out, without being too close. What is the yardstick for closeness ?

The current strategy used in the EUR/USD trading is the Edward’s Forex Trading Strategy # 1 (Fast Moving Averages Crossover) on a 15 minute time frame with EMAs 10, 25 and 50, and I would like to seek your opnion about STOP LOSS placement.

Based upon the recent 13th November 2009 (Friday) chart at 12:15 hour, the trade entry was initiated at 1.48698 where all the EMAs 10, 25 and 50 made a crossover confluence towards an uptrend direction.

The Support Level was at 1.48266 (47 pips away from initial trade entry)

However, the trading cycle ended with the 1st phase exit at 5:45 hour on 16th November (Monday) with the EMAs 10 and 25 crossover towards the downside at the same point of 1.48698. Later coupled with a consolidation, the final exit was at another confluence of 3 EMAs at 1.49625 on the same day (16th November) 13:45 hour. The whole trade cycle build up a total of 94.5 pips.

Under such trading circumstances, while locking in the BUY entry unknowingly where the consequent trend will be, could you please suggest (a) a probable (optimum) STOP LOSS location, and (b) critical success factors of consideration preventing a possible stop out situation (if any to happen).

Your suggestions are very much appreciated.

Thank you.

Regards.

George FXtrades.
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Re: Stop Loss for a Crossover Strategy

Postby Edward Revy » Thu Dec 03, 2009 2:41 pm

Hi George,

How far is far and how close is close?

There are several measurements/guidelines for placing stops:

1. Stop < Profit target, e.g. Risk < Reward. This rule works only when you know in advance WHERE you will exit.

2. ATR based stop. We take ATR 14, multiply it by 2 or 3 and get a safe distance stop.

3. Daily range average with custom indicator (see the attachment) - will suggest you how much room left in each direction based on Average trading values from previous days.

4. Common sense - place a stop at the level, where you would 100% agree that a trade went wrong + you should be confidently saying that you'd take an opposite trade at that level. In other words, an opposite entry order can be your exit.

5. Fractal based Stops - in a uptrend take Bill Williams fractals and place a stop behind the most recent lower fractal. Wait till the next upper fractal materializes - that's the reference point. Once THIS upper fractal is broken, you're allowed to move a SL to the next lower fractal. Opposite true for a downtrend.

6. If you don't know when you're going to exit with profit, but you know how much on average a trading setup and a pair you trade can yield per move, you can also opt for a fixed stop of 20, 30, 50 etc pips. The time frame will matter and your history of trading results should back up your stop preferences.

7. Placing stops with Heiken-Ashi candles is another good way to find a close stop. See indicators attached.

8. And finally, entering trades at horizontal S/R levels on double/triple tops/bottoms, at trend line S/R levels, at channel S/R levels - an application of this kind of technical analysis will get you in a trade with the lowest risks and probably the tightest stops.

9. Regarding your last example, George, I'd love to see a screen shot. With Moving averages the best place for an initial stop is previous swing high/low. After that you can seek for a tighter stop using any of the methods given above.

10. To summarize everything, I would still say that for me, every new chart, time frame and trading setup would mean re-evaluating the stops. When I enter a trade, even if I have an indicator to suggest a stop, or a fixed ratio to apply, I still have my own opinion about the best stop for EACH particular trade. That's why
I'm trying to answer your questions, but there is always seem to be just more questions, that's because each trading case will be unique.

Best regards,
Edward
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Re: Stop Loss for a Crossover Strategy

Postby j4oKsZQO » Tue Jan 05, 2010 8:32 pm

Good Post @ Edward Revy :)

Thanks
Trade Forex - MetaTrader - 140+ Trading Tools - No Spreads - Micro, Mini, Or Standard Accounts Min $1 Deposit - Win A Hummer! - www.tinyurl.com/instant-currency-trading
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Re: Stop Loss for a Crossover Strategy

Postby Ghaz » Sun Jan 17, 2010 4:35 pm

hey Edward.

i dont want to open a new thread for my newbie question.
First of all thank you for this GREAT website. Just Forex knowledge without scam or other "buy this!"-Shit.
I am demo trading the forex strategy from Teodosis (Moving Average). It is quiet simple and I see when to enter and to exit the market.
The only thing I dont know is, to set the right stop loss and take profit point!
First I worked with a fixed Lost:Win Ration of 1:3. But at a certain time my take profit was too far away. I made lost instead of getting money, although the chart was in a plus position für about 170 pips!(when I am on my pc i would close the position manually, but I want to identify a trend set my SL/TP and may go away or something else 8) )
So I am searching for a god money management, because setting SL and TP is moneymangement. Can i trust this calculators, where i just have to fill in some numbers and get the perfect SL?

To your previous answer:

"Fractal based Stops - in a uptrend take Bill Williams fractals and place a stop behind the most recent lower fractal. Wait till the next upper fractal materializes - that's the reference point. Once THIS upper fractal is broken, you're allowed to move a SL to the next lower fractal. Opposite true for a downtrend."

Do I understand this right: I am waiting at an uptrend till the cross of EMA 18 & 21 and the two other indicators and look at the last fractal low-candle. When the first up-candle appears the low shadow of this candle ist my SL???

"2. ATR based stop. We take ATR 14, multiply it by 2 or 3 and get a safe distance stop."

WHAT should i multiply?- the value of the ATR?-but it is a VERY low number :oops:

I know that I am answering stupid questions. But I want to learn more!!


best regards,


Florian
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Re: Stop Loss for a Crossover Strategy

Postby Ghaz » Sun Jan 17, 2010 4:51 pm

sorry for writing again:


I see at the comments of the strategy that someone uses the SAR for setting his Stop Loss. I think he sets the SL at the point, which the SAS shows?-but is it not to far away from the chart?-what is better?-fractal or SAS?
And how I get the TP ?-Stop Loss multiply by 2 or 3?
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Re: Stop Loss for a Crossover Strategy

Postby Edward Revy » Sun Jan 24, 2010 4:09 pm

Hi Florian,

You're asking good questions, in fact. The way you set stops and profits will determine the outcome. As you said, you can watch a positive trade to hit +170 pips and, after turning your back for few hours, come back to see that you're facing losses.

Here is the method of "setting SL/TP and going away or doing something else" 8)

To project our profit targets, we have to be able to know how much any chosen currency pair is able to deliver in 1 day. For example, you can ask GBPJPY for 200 pips daily and receive it, but you can't expect the same generosity from, say, EURUSD, although happens from time to time, but to increase our odds we need average. Each pair has its own Daily Average Range.

Thus, you can start using the Daily Average Calculator indicator I uploaded earlier, or find any other means to calculate Daily Average, but you have to have those numbers when you trade and you don't want to babysit your trades.
There are several ranges calculate, take 20 day Average. For GBPUSD it was 142 pips today.
Why 20 day? Because if you add 4x2 weekends, you get 1 month worth of data. I like it this way: more data - more accuracy.

Now, next time you enter a trade, you know how much room in pips you have when you're buying the pair, and how much - if you're selling.
(Basically, the same tells you the indicator we talk about: Room up & Room down).

Next, within the room suggested look for the most obvious S/R levels: price based, trend line based, Moving averages based etc... pivot levels as well.
Place your TP at the best in your opinion level, also calculate risk:reward you'll be getting.

Stop loss - use any of the recommended earlier in this thread methods.

"Fractal based Stops - in a uptrend take Bill Williams fractals and place a stop behind the most recent lower fractal. Wait till the next upper fractal materializes - that's the reference point. Once THIS upper fractal is broken, you're allowed to move a SL to the next lower fractal. Opposite true for a downtrend."

Do I understand this right: I am waiting at an uptrend till the cross of EMA 18 & 21 and the two other indicators and look at the last fractal low-candle. When the first up-candle appears the low shadow of this candle ist my SL???


I believe you've interpreted it wrong.
Let's take uptrend and your example: when EMA 18 & 21 cross and two other indicators agree, we go Long and place SL below the most recent Fractal (below the fractal-low candle).
Now, we're in a trade. It goes our way and withing several candles we get a first Upper fractal - it is our reference point. See the image below.
Until price breaks through the Upper fractal, we don't move our stop.

"2. ATR based stop. We take ATR 14, multiply it by 2 or 3 and get a safe distance stop."

WHAT should i multiply?- the value of the ATR?-but it is a VERY low number


You have to multiply the value of the ATR. The value could be, for example, 0.0036. It we multiply it by 2, we get a stop distance of 72 pips.

Best regards,
Edward
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Re: Stop Loss for a Crossover Strategy

Postby Edward Revy » Sun Jan 24, 2010 4:13 pm

SAR is most valuable for placing trailing stops, while trailing stops are most useful when you plan to exit soon.
I would highly recommend reviewing the idea of timing SAR stops with this method of mine:
http://forex-strategies-revealed.com/mo ... s/cci-exit

Best regards,
Edward
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Re: Stop Loss for a Crossover Strategy

Postby Ghaz » Mon Jan 25, 2010 4:49 pm

hi Edward,

thanks for your great explanation. Hope, I will learn much more about Forex.
I added a picture from a trade today. I use the Teodosis Moving Average method. When I got short all indicators were ok.
So i looked for a good stop loss and take profit. Thanks for the pip calculator. I made it in this way. First i looked for the last up-fractal. I thought it is TOO far away from my entry-point. So i looked to the calculator. Romm down was 300 Pips (that means, in average of mayby 20 Days the trend goes down for 300 points, right?).Ok, i set my SL 100 pips over my entry (the calculator told this tightest point) and the TP at 250 Points (under the average of the calculator).

Was it allright so?

Is the last down-fractal the reference point or the the first fractal in the future which will appears after my entry?-when I see her, i will make your plan of trailing the stop. A great strategy!
Another question. I read something about your strategy (Trading method #1 (9 EMA Entries)). Can i use this here?-When the first candle closes ABOVE the EMA 9 in a sell trend i will go out?

thank you very much....
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Re: Stop Loss for a Crossover Strategy

Postby Edward Revy » Thu Jan 28, 2010 12:01 am

Hi there,

Romm down was 300 Pips (that means, in average of mayby 20 Days the trend goes down for 300 points, right?).


No, not like that.
First of all, your charts use 5 digit quotes (e.g. 1.47148 - there are 5 decimal points there), but the calculator "knows" only 4 digits.
Therefore, it was not 300 pips, but rather 30 pips for EURCHF on that day. You should disregard the last digit in the Calculator numbers when trading on 5 digit platform.

Secondly, the Room up, means the room left for today's trading. We take an average of the past 20 days just to find the most probable range for a currency pair today.

Is the last down-fractal the reference point or the the first fractal in the future which will appears after my entry?


Since price has been trading down for some time already, the last down-fractal will be your reference point. When you enter on a market reversal and a new trend is just beginning to form, then the first fractal in the future will be your first reference point (the way I illustrated earlier).

I read something about your strategy (Trading method #1 (9 EMA Entries)). Can i use this here?


You can use it here, I don't see why not. You can use it anywhere for entries and/or exits if you want to. I like 9 EMA trading a lot.

Best regards,
Edward
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Re: Stop Loss for a Crossover Strategy

Postby Ghaz » Sun Jan 31, 2010 6:09 pm

thanks for you reply Edward,

ok, on this day ther was 31 pips down left. The tightest stop loss should be read in the same way?-10,4 pips?-but is this not too near at my entry point?
And what is with other currency pairs like JPY?-They have just 3 digits I remember....
I want to calculate my stop loss, because I dont want to have feeling by trading :oops:
My take profit will be made with your strategies (9EMA or Fractals)....
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