A Tale of Elk's Mysterious Feet
In the mythology of stock traders, there are animals known to the general public as Bull и Bear. But it is unlikely that English-speaking users are aware of the existence of Moose in tradingdespite the daily use of the Moose. Russians, on the other hand, know who this Moose is, but not everyone knows where to put him, much less how to communicate with him properly.
StopLoss is essentially the same order, but, unlike the rest of its brethren, it is a limitation of risks rather than a gain. Unfortunately, not everyone knows how to use this "risk-adder", and often they put it in the list of extinct, completely throwing it out of their strategies, which leads to deplorable results.
Why Moose are not loved in the woods? Because this unpredictable animal tends to stand where the price will pass, and then choose a bear or a bull to accompany it. Why does this happen? Partly because of inept handling of these herbivores, partly because of the maneuvers of the Whales. Thus, the Moose become the Scapegoats in this fabulous forest. Now to reality.
One of the rules of money management says: "Limit your losses for each trade to no more than 5% of your balance. In other words, this means that Moose can go no further than the number of pips allocated to him, depending on the order volume of each trade. But this rule is not always appropriate in every situation. Judging by the long-term charts, we need the level of stop low enough to take into account the noise, and high enough to maintain the 1:3 stop/profit rule. At 15-minute charts, putting a large stop means not making enough profit, while a bit higher it means getting trapped by the noise. For aggressive speculators such prospects are generally unacceptable, because the size of the stop decreases as the volume of the order increases. So where to put it?
First, you need to evaluate where in a particular situation it will be safe to place a stop. If you are using channels, a stop is usually placed behind the channel boundaries. If they are support/resistance levels - beyond levels. Thus, when you break channels or boundaries, there is a high probability that the trend will reverse, and your funds will be saved from imminent death. If there are no channels or boundaries nearby, the best option for setting a crowbar is above or below the previous candle to sell or buy, respectively. There are several standard indicators (the turkey is also an animal!) that make it easier to set exit points - Bollinger and Parabolic. With Parabolic, everything is simple - the stop is placed on the indicator points, and the Bollinger works by the channel rule.
After all the "over" and "under" the distance between the intended entry and the stoploss is measured. If the possible losses will be less than 5%, and the profit will be quite achievable, you can safely enter the market.
Often this data is not enough to assess whether an exit is correct or incorrect. If the possible loss is more than 5%, and the profit increases to the sky, it is better to wait for a more favorable situation. If the stop level turns out to be too small, it's better to give it a little more freedom, so it doesn't get hit on the horns by the "bogged down" price.
But this is not the end of the Moose's adventures. Once the price has reached a certain positive distance from the entry point, the Elk can start to follow it. By following the rule "above/below the previous candle", the Elk can successfully catch up with the price at the point, where the momentum has been exhausted and is asking for a pullback. For this purpose it was specially developed floating stoplossbut with the limitations of the clauses it does not bear the desired fruit.
Such ways of limiting risk make it more difficult to test strategies and expected monthly returns, but they are more flexible than a clearly specified size of a lot.