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.