My Simple Strategy

GazFx

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Kxeroo said:
Gary I have some questions. Okay you outlined entry rules clearly there is no problem on that. But what would be the exit of the trade? Is it totaly discretionary or there is certain things you follow or should be followed?
Another thing is knowing trend doesn't last forever is there any way to eliminate a possible loss of a trend turn or ranging markets?

Regards,
I gave some feedback on this in the post above, but wanted to expand a little more to give greater insight, so I have spent the morning putting my thoughts in writing. I trust this helps in establishing your own set of exit rules.

Trend Continuation Strategy
Exit Methods


I have said it before, and I will say it again, “Getting into a trade is easy…getting out is hard.”

The search for the perfect exit strategy continues.

Like most trading strategies, the Trend Continuation Strategy provides clearly defined entry rules that are easy to interpret and apply. Making the exit, however, is anything but clearly defined. This is not unique to this strategy.

Why is making the exit so difficult? We have no way to determine in advance how far prices will move before reversing. We cannot plan ahead with certainty, and that makes us vulnerable to second-guessing and emotional decisions.

Taking a closer look at the Trend Continuation Strategy, you realize that there are only three exit methods available other than the initial Entry Stop Loss: (1) Profit Target, (2) Trailing Stop Loss, and (3) SSMA Exit Signal.

Profit Target: *

This could be as simple as multiplying the stop-loss by a given risk-reward factor, or setting a percentage return on account funds, or targeting the next support-resistance level. For example, a 30 pip stop-loss could be multiplied by 3 to produce a profit target with a 1:3 risk-reward ratio, or you could exit the trade when open profit hits 5% of account funds.

But, already you can see the arbitrary nature of these methods. Should the profit target be a 1:3 risk-reward, 1:2, or 1:5? Should it be 5% of account funds, 3%, or 15%? Should I use H4 support-resistance, H1, or D1? There is no certainty.

Trailing Stop Loss: **

The adage “cut your losses short and let your profits run” is as true today as it ever was, and the Trailing Stop Loss is the perfect tool for achieving this. In fact, the Trend Continuation Strategy already includes the Trailing Stop Loss method to protect account funds whilst allowing a trade room to play-out. It is especially good at locking-in an increasing portion of unrealized open profits over extended price trends, but it is also prone to give back large portions of profit when the trend reverses direction. It’s not perfect and presents dilemmas of its own.

Too wide and you risk giving back too much profit, too narrow and you risk premature exit from an otherwise profitable trade.

How you use the Trailing Stop Loss will depend on your personal game plan. If your plan is to use the Trend Continuation Strategy as a series of entry points to build a long-term position, then a Trailing Stop Loss will provide the perfect solution, but if your plan is to enter and exit short-term opportunities within a price trend, then it’s not a perfect solution. If your focus is short-term, you will do better to use the Trailing Stop Loss to protect funds against catastrophic loss, and rely on something a little closer to price action to time your exits.

SSMA Exit Signal: ***

Smoothed moving averages (SSMA) of short periods will track the price action closely, with smoothing delaying crossovers until a clear exit signal has occurred. This is my preferred option for short-term trade opportunities. It is simple to apply, and gives definite exit signals that can be relied upon.

Take two smoothed moving averages, one of 3 periods, the other of 5 periods, applied to the close price. As you can see, they hug the price action closely, but smoothing delays crossover and prevents premature exit.

Short-Entry_Exit-Example.png


In the EURUSD above, the first entry/exit scenario clearly demonstrates the advantages of this exit method. The second entry/exit scenario demonstrates what can happen if you follow this method blindly. Whilst the exit generated a (tiny) profit, the trend subsequently continued downwards. My suggestion is to ignore SSMA Exit Signals if price action is close to the EMA50, but to act when it occurs at the end of an obvious price trend, as in the first scenario. Too subjective for you? Then simply act as soon as a SSMA Exit Signal occurs.

Moving on to the GBPAUD below, again the use of a SSMA Exit Signal is demonstrated. This time, however, we get an example of the trade-off between maximum profit potential as opposed to the actual profit derived in this instance. Is it possible that we could have anticipated maximum profit potential ahead of time? Is the resulting profit acceptable? You have to decide.

Long-Entry_Exit-Example.png


You can combine a Trailing Stop Loss with SSMA Exit Signals to build a long-term position, by using the SSMA Exit Signals as Add Position Signals instead. The Trailing Stop Loss is widened and used as the exit mechanism, whilst new positions are added as the trend develops. Big profits are made this way, but you need to exercise discipline and conviction to ride-out the many price retracements along the way. After all, it’s these retracements that present the opportunities to build the position.

AUDUSDH4add.png


Conclusion:

This is a brief outline of how I personally deal with exits. It is by no means perfect, but it does give me definitive parameters on which to base my decisions. It works for me.

Everything is a trade-off. Set a Trailing Stop Loss, or Entry Stop Loss, that is too tight, and you will lose less money on a losing trade, but do so more often. Set a stop that is too loose and you will lose more on a losing trade, but do so less often. Use only a Trailing Stop Loss, and be prepared to give back profits but build a potentially bigger position, or use the Trailing Stop Loss to protect against catastrophe while SSMA Exit Signals take care of profit extraction.

I think that what we are delving into here is intuition based on personal exposure to the markets and experience gained. This intuition allows a trader the flexibility of applying the same strategy to multiple markets or asset types, but with subtle differences that recognize the behavior of one over the other. For example, volatility expands and contracts at certain times for specific asset types, and your knowledge and intuition will dictate the subtle changes you make to accommodate this…almost without having to think about what you are doing. But I can’t teach you this. Nobody can teach you this. So there are no short-cuts!

All we can do is establish a rules-based strategy, and apply it rigidly, only departing from the rules when genuine intuition is attained. We cannot define when that will be, but we will know when we get there. Until then, choose your rules and stick to them.
 
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