In this article we will continue to describe various methods of risk management based on dynamic trailing stop.
TrallingStop on daily highs / lows
To maximize profits a trader needs as long as possible stay on track. If we take the definition of a trend - a purposeful price movement in which each subsequent low or trough is higher than the previous one, then it is necessary to place the level of fixation of losses just on these lows. Thus the profit will grow until the subsequent minimum will not be lower than the previous one and the trend will not change.
This stop has the following logic of movement - the level of fixing losses is set on the highs or lows of the price of a certain number of days (2-4). On the average take 2 days. As a rule, the upward movement takes a stop on the minimums, and the downward movement takes a stop on the maximums.
Figure 1 shows general view of the stop order by minimums in the case of an uptrend. After the transaction on the third day, the minimum of the previous two days is determined, and then the stop is set at its level. By the end of the 4th day the stop is established on level above on a new minimum. On the 5th day the stop has not changed its position, it also remained at the level of the end of the 3rd day, the beginning of the 4th day. On the 6th day the stop also remained at the level of the opening of the 4th day. On the 7th day, the stop moved higher to the low of the 5th day. Thus, the level of the stop was moving until it was broken by the price on the 11th day.
Figure 1. A stop on the daily lows.
TrallingStop relative to price levels
Price movements in the Forex market are highly dependent on support lines and resistancesThe channel is a derivative of the support and resistance lines. When you break the support line, it becomes a resistance line and vice versa. As a rule, at breakdown of strong channels, where there were many touches of support and resistance lines, a strong trend begins and it is necessary not only to enter correctly, but also to keep profit. For this purpose it is used TrallingStop on the channel or support and resistance lines.
For this purpose it is necessary to define the channel in which fluctuations of rate occur, and to expose it at a certain distance from border of the channel stop, at breakdown of the channel will change a trend, and the transaction will be closed. For the downtrend a stop on the upper border of the channel or resistance line is used, for the uptrend a stop on the lower border of the channel on the support line will be used.
The distance at which TrallingStop is set should be chosen so that random channel breaks do not reach its level.
When the upper limit of the channel is broken, it becomes a support line, and on the rebound from it, the stop is placed at a certain distance from the new support. This type of TrallingStop is good for markets with strong volatility and for trading strategies based on rebounds from support and resistance lines.
Fig. 2. Stop order by the channel for the uptrend.
Stop on ATR%
The method of stop on the ATR% is used by many traders. By using indicator ATR (Average True Range) determined by the volatility for a certain period, as a rule, take 14 and the stop order is placed at a certain distance from it. Using ATR indicatorThe trader adapts better to market changes and reacts more quickly to the changing market situation.
TrallingStop by indicator
TrallingStop on the indicator speaks for itself, the level of fixing losses is set in relation to the value of the indicators. One of the most common and classic indicators is Moving Average and its different variations. This indicator, in addition to determining the trend direction, can also act as a support level. And the penetration of this line is a signal of change in the trend, so at a certain distance from the value of the indicator we set a stop to fix the losses. The distance should be such that random, false fluctuations did not touch the stop level.
Figure 3 shows the scheme of this stop. Using TrallingStop by Moving Average indicator is well suited for low volatility markets without sharp fluctuations, with clearly defined trend movements. A stop on the Moving Average allows you to gently follow the trend movement and fix the profit.
In addition to Simple Moving Average To reduce the lag and smoother movement, I use other modifications of this indicator: Exponential Moving Average and Linear Moving Average. The Exponential Moving Average allows the trader to close the deal as close to the top as possible. Moving averages show long trends well, but do not work well on an undefined trend when there are many crossovers with the moving average.
Fig. 3. Stop on the Moving Average indicator.
TrallingStop in the loss zone
Another type of stop. An interesting modification of the stop principle, not for the profitable area, but for the unprofitable area. If the "Booby", "Stepping Stops" and others are stops in the profit zone, with the goal of taking as much profit as possible from the trend movement and at the same time retaining it. TrallingStop in the loss zone is opposite. First, it is not turned on in the profit zone, like all the others, but in the loss zone. And second, his main goal is to minimize losses.
Let's consider the principle of its action. If the trader has made a trade, but the market began to move in the opposite direction and there are no signals that there will be a reversal of the original movement, then the use of the stop in the loss zone will reduce losses.
Figure 4 shows the general principle of this stop. With each certain level of loss (LOS) the trader moves the stop towards the rising loss. Thus he minimizes the accumulating loss. At the zero level of loss the trader sets the initial TrallingStop at a certain distance from the purchase price. If unsuccessful and further downward movement to the level of CC 1 when touching this level of loss stop is moved closer to the current price, and after reaching the level of loss CC 2 stop is moved even closer, which helps reduce the increasing losses from the misdirection of the market.
It may be noted that TrallingStop in the loss zone very much like the "Steps" stop, only it differs from it in the area where the foot moves.
Fig. 4. Stop in the loss zone.
We have described the different types of trailing stops and the conditions of their application in the market. The dynamic stop is an effective method of risk management. Using TrallingStop at market will significantly reduce losses, and loss control is an integral part of profitable trading.