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Hi All,
I have been searching for an effective stopping methodology for a
very long time (since I began trading). I experimented with several,
like all kinds of MA based stops, Gann's Rule of Eights stop, ATR
based stops etc., I finally may have found a good one. It is based
on the theory that there are essentially two types of markets:
Trending and Trading Range. An instrument does not start a new trend
immediately after ending the previous trend. It might go into a
consolidation phase (Trading Range) before starting a new trend. The
problem is to time this start of a new trend. Sometimes we have to
wait for a long time indeed, thus if we enter the market too soon, we
get whipsawed. To solve this problem, I came out with the
following: Use a "mental stop" on day of entry at a reasonable
distance from your entry point. Either an ATR based stop or a pivot
point support/resistance based stop would suffice and exit only after
20 minutes has passed since your mental stop is exceeded and you are
still losing. Use a 3BSMA stop during the initial stages (from next
session after entry when the start of a new trend is still not yet
confirmed) in accordance with the principle: Cut your losses short.
Plot(MA(C,3),"MA3",colorWhite,1);
Once, a new trend has started (confirmed by LinRegReveral Indicator
and/or Zig-Zag trend indicator) and powerSAR has also confirmed the
new trend, use the following stop in accordance with the principle:
Let your profits run.
Plot(scPowerSar(0.02,0.01,0.2),"PowerSAR",-16,8+16);
(You need AB's dll's to use this function)
SAR is the Stop and Reverse system developed by Welles Wilder. This
system indicates where one should exit a trade and simultaneously
reverse positions. It may also be coded to provide a stop for
tomorrow's trading action. This function does not work with
Equivolume chart.
This provides a systematic way to set a stop order. The stops are
changed daily and are adjusted to suit the market's conditions. It
also keeps you constantly in the market. When one gets stopped out,
you are also to initiate a trade in the opposite direction (In
reality, you would already may have gotten a reversal signal and may
be already trading it using a 3BSMA stop). This is generally used by
futures and forex traders. Stock traders could of course short the
stock however, one could also just buy stock and sell it without
shorting it. Then when the next buy signal occurs, jump in again.
This can be quite useful during trending markets however, it is
practically useless in trendless conditions (I use Dr. John F. Ehlers
Squelch functions to distinguish between trending and trading ranges)
or when the price is consolidating. One can get whip-sawed and make
several losing trades under these trendless conditions.
This function is inherently a trend-following study. It increases
the stop level each successive day until the 10th day that the market
is still trending. At this point, it raises the stop level
proportionally daily. This is due to the observed fact that 10-day
runs are extremely rare. These long runs do occur however they only
occur around 5% of the time. So this works magnificiently in trends
and miserably in congestion or consolidation periods, but works well
when combined with a 3BSMA stop during the initial stages (when the
start of the new trend is not yet confirmed and you want a tight stop
just in case the new trend did not start. Doesn't mean that you were
wrong in trading it, just that sometimes it takes a long time for a
new trend to develop and most people don't have the guts to buy when
everybody else is selling and sell when everybody else is buying and
that is one of the reason most traders lose and ofcourse they may
also lack patience and also adequate capitalization, money-management
(PositionSize, MaxOpenPos, MaxRisk, PositionScore etc.,))
Any feedback appreciated. TIA.
rgds, Pal
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