Move stop loss from retracement to retracement? Or is there a better exit method?

Trading Discussion Risk Management Practices
1

Hi again, Traders,

Time to pick brains again.

IF YOU’RE NEW TO THIS THREAD, YOU’LL BE READING SOME THINGS THAT I’VE SAID THAT I WISH I COULD TAKE BACK, BUT THAT WOULD BE TOO COMPLICATED. BEFORE YOU GO ANY FURTHER, PLEASE READ POSTS 8 AND 10 FOR AN EXPLANATION.

THANK YOU,
Norm

I’m trading the daily, and am using an exit system that is working nicely; yet, it goes against conventional wisdom. This causes me to wonder whether my system is the best. So, if anyone can give me a good reason to switch, I will; and, of course, this discussion may help others, as well.

It seems to be the consensus that the best way to exit a trade is to advance the stop loss from retracement to retracement until price takes you out. To me, this seems retrogressive and a waste of time and money. (If this is your system, please don’t throw rocks. I love rocks. Throw money, instead. I hate money.)

Here’s a case in point. I’m looking at a modest retracement on a daily chart right now. It retraced for two days and then took seven to get back to where it started. That’s nine trading days - almost two calendar weeks - without gaining a penny; and if it kept retracing without returning to its level of origin it would have consumed even more time and caused a loss all the way to the previous stop location.

What I’ve been doing is simply exiting my trades as soon as see I a retracement beginning, and then entering other trades which, I’m happy to say, are proving to be low risk and high probability.

As I see it, why waste time, and possibly money, going backwards? But again; if anyone can make me see why retracement hopping is a better method, then I’ll adopt it.

Happy trading, everyone,
Norm

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2

Good post Norm, its indeed the exits we should be spending time thinking about and refining.

Up to this point I would always have said, if you’re in a trend-following long-term trade, get out when there’s a sign from the chart that the price momentum is weakening - close at the start of the retracement.

But I am now looking to being more aggressive and have for the first time in my trading, attached TP’s to my trades and new orders. Too many times I have been hit by bad retracements or even trend failures when there was absolutely nothing on the charts to show this was coming. The latest occasion was the nasty uptick in AUD after better than expected Aussie job figures. I’m now aiming to actively reduce my time in positions. Re-entry is quick, cheap and easy, but with money already in the bank, I am not in any way compelled to trade it again or re-enter, there might be better opportunities elsewhere by that point.

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3

@NormanA I’ve been thinking about this as well! I’m still in demo mode would it be crazy to open short on the sign of a retracement?

If your broker allows hedging… The short keeps the long loss ( from retracement/pullback) at bay and if indeed it was a retracement/pullback and not a trend change close the short on confirmation of trend resuming and use this as a point of entry to pyramid.

Perhaps much easier said than done?

What do you folks think?

FR&L

4

I do this as I’ve found it to be useful in maximising profit on a trade, but I also open more positions if I see the trade continuing in my favor. But I am interested to find out why this is unconventional for some traders,

5

Hi guys,

Please forgive this batch response. You’ve each said or asked something of significance to me, and I’d like to say a word or two to each of you, and then something I think you’ll all be interested in.

[quote=“tommor, post:2, topic:168747”]
Good post Norm, its indeed the exits we should be spending time thinking about and refining. . . . I am now looking to being more aggressive and have for the first time in my trading, attached TP’s to my trades and new orders.

Hey Tommor,

Thanks for the words of encouragement. When I trade live, and I don’t think that that’s far off, I too will be placing reasonable TPs on my trades when I leave the house for long periods. Then, when I return home, if they’re not hit, I’ll adjust them and my stop level as I think would be best.

Hi frandlost,

I’m not sure what you’re asking, but I’ll give it a shot. It’s a standard technique to enter a long trade at the bottom of a retracement to the south as it’s about to turn north, and a short trade at the top of a retracement to the north when it’s about to turn south. You’ll get more pips that way.

Your question also brings a relevant point to mind. I can’t imagine a situation where anyone would want to enter a long trade when price is dropping, or a short trade when price is rising; and if that’s the case, then why would anyone want to do the same thing in the middle of a trade, that is, ride out a retracement that is going against them? I can’t think of a reason good enough to make it worth it; but stay tuned: perhaps someone will turn on the light for the rest of us.

Hello Josh,

Glad you’re profiting with retracement hopping, and here’s where I want to say something that I think would be of interest to all:

I’m in the middle of testing various exit methods, and I’ve been treated to a few surprises already. When I finish, I’ll share my results.

Oh, and Josh, I do think you have a really cool curl, the envy of all who care about their hair from South Africa to Iceland. :innocent:

God bless you all,
Norm

6

Hi @NormanA - I think you have raised a question which some think is quite important and I’m not sure there is a definitive answer.

If I were a short term trader looking for 20 pips on a trade, trying to get in early on a strong move, then I think you are right - out as soon as it started to look “Risky” - bet over, go looking for a new opportunity.

But if you were trading a strategy based a naked or semi naked version of say @Dennis3450 strong weak analysis, and hopping out every time a retracement started, then you would be leaving a position based on intraday noise. The real problem then is how to get back in based on a logical entry. Especially so when the retracement could easily end and reverse when you are asleep or at work and you could easily turn the computer on, to find you’ve missed out on 100-150 pips of movement - ?

Moving Average crossover base ? An experienced trader may well decide that a large distance between the averages, MACD behaviour or an extended RSI for example, coupled with even a hesitation in price was an exit point !

As in all things ‘trading’ your behaviour can only be successful if it is in harmony with your own personality and risk aversion.

Hop out of trades at every retracement in a trending market - you will be forever cursing yourself for missed opportunities and watching potential profits running away from you. Try to ride out retracements in a choppy sideways market ? You can lose hugely on every ‘fakey’, or win every bet, if the trend continues sideways and your nerve holds.

Some bet big on small moves (pip wise) to make up their “Risk percentage” - some bet tiny on big moves to risk their “Risk percentage” - some look for “tops and bottoms” in ranging markets. You cannot play the same rules for each of them :smiley:

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7

Hi Falstaff,

I wouldn’t consider getting back in to that trade as a greater possibility or priority than getting in to any other trade. At this point, I scan over twenty pairs for possible entries with all possibilities starting on an even playing field.

Not true in my case. I’ve been doing quite well hopping out of one and into another. An illustration: Ten dimes equal a dollar; but so do twenty nickels, and by trading the dailies, spread cost is insignificant, though I do compensate for spread when setting my levels. You’ve heard the saying, “Three steps forward, two steps back.” That’s the way I presently feel about riding out retracements. (I hope no one thinks I’m saying that the ratio of retracement pips to trending pips is 2:3!) I’ll take the twenty nickels, which, it seems, would accumulate faster than ten dimes with retracements, and occasional losses because of the retracements, in between.

For clariy’s sake for all concerned, I’m still in demo.

Take care,
Norm

8

Hi everyone,

I’ve said a bunch of stuff since my original post, and I think I need to clarify something. There are various exit methods that are designed to get us out of trades without suffering too great a loss because of retracements, such as, following fractals and following PSAR dots, but this is the method I’ve been questioning all along, which I identified in my original post:

That is the only method I’ve been holding in question.

I do not believe we should exit trades at every single retracement. That would be foolish. We’d never get anywhere. Perhaps I haven’t made myself clear, and if that’s the case, sorry if I misled anybody. I simply believe that there are much better ways to exit than advancing the stop loss from retracement to retracement; and I think I’ve discovered at least one way, a much better way; and when I finish my testing of various exit methods, I’ll post my results. Perhaps in another few days. It depends on how busy I am with other things.

Happy trading,
Norm

9

Perhaps I was a little clumsy in my post @NormanA

The one thing you have not told us is the timeframe you operate, it seems from your recent posts that you are very small timeframes ?

My postulation revolves around the need to tailor your exit strategy to your own personality and the timescale you are trading :sunglasses:

10

Hi Falstaff,

I began my first post by stating, “I’m trading the daily.”

However, I must confess, I lost track of the exact exit method I was addressing, which is moving one’s stop from retracement to retracement, and began talking about not riding any retracement down under any circumstances, as I explained in my last post. Ridiculous, of course. In fact, I just changed the title of this thread to make things perfectly clear.

Well, just goes to show you. When we put something out in public we need to keep our wits about us.

To reiterate, I think there’s a much better way to do it than that method, and I’m testing various exit methods.

Take care, Falstaff,
Norm

11

I believe entering on the sign of a retracement for a short sell, is considered a counter trend trade. It depends on the trader really. I’ve watched videos where some people don’t trade the counter trend, and some vids where they take advantage of them. So, it just depends on what you’re comfortable with.

12

I am glad to see you are thinking about exits. They are where the money is made. I look to a lower time frame. When price begins to consolidate it will form parallell levels of S/R. This in and of itself is not an exit.

I then look for price to breakout to the downside if I am long or the upside of the channel if I am short. Be aware that in a deep retracement price action could penatrate a level temporarily but immediatly rebound back. A significant break of a S/R level on the lower TF is your exit.

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13

Hi justshell,

Perhaps your comment is based on my statement in post 5. In any case, here’s what I wrote: “It’s a standard technique to enter a long trade at the bottom of a retracement to the south as it’s about to turn north, and a short trade at the top of a retracement to the north when it’s about to turn south.”

I reread it, and it’s accurate. In both cases, the long and the short, the trade will be in the direction of the trend. The phrases to focus on are: “when it’s about to turn north” and “when it’s about to turn south.” “north” meaning long, and “south” meaning short. A countertrend trade is when one trades against the prevailing trend.

Take care,
Norm

1 Like
14

Hi Traderjohnsblog,

Thanks for sharing your exit method. Some readers may find it helpful. I’ve got my focus on different methods at this time.

Norm

15

Hi Everyone,

I told you I’d do some testing of various exit methods and present the results. Here’s the summary.

I tested by going back a couple of years and progressing one candle at a time on MT4 from the right edge of the daily chart on AUDJPY. I performed ten tests on a strategy with Heiken-Ashi candles, ten with the same strategy with traditional candles and beginning on the same date, and ten with traditional candles with the same strategy, but beginning on a much different date.

With each group of ten, I tested three different exit methods. After I tested one method, I returned to the beginning of the trade and tested the second, and then the third. On no test did I exit manually, but waited for price to stop me out. The methods were:

  • PSAR. For those who need to understand what PSAR is, do a search for Parabolic Stop and Reverse. For each test, after I set my entry and stop level, I simply moved my stop from PSAR dot to PSAR dot and noted the number of pips I gained or lost (in the negative zone) until price stopped me out.

  • FRACTAL HOPPING. I’m referring to Bill Williams fractals. (On MT4, they can be placed on the chart, as follows: Insert>Indicators>Fractals OR Insert>Indicators>Bill Williams>Fractals.) A fractal is painted each time even the smallest retracement forms. More on this later. Again, I simply advanced my stop loss from the candle tip where one fractal formed to the candle tip where the next fractal formed until price stopped me out.

  • 2-CANDLE TRAIL. From the very beginning of each trade, as soon as I was able, I trailed the new candle by two candles behind, but with discretion. If the candles were unusually long, I might trail by just one candle. If candles were short, I’d wait until perhaps three or four formed, then advance my stop a distance approximately equal to a 2-candle trail. If a candle showed indecision or possible reversal, I’d tighten my stop, sometimes radically. Because this was the only exit method that involved discretion, I tested it first so as not to prejudice my decisions after viewing price action when testing the others first.

RESULTS
When comparing results of the individual trades in each group of ten, each of the exit methods might come in first, second or third as far as best results are concerned; but when looking at each group of ten as a whole, 2-candle trail kicked butt each time.

Here are the over all net pips (winners minus losers) for each of the methods over the thirty trades:

  • PSAR: 2,138 net pips for an average of 71 pips per trade (2138 divided by 30).

  • FRACTAL HOPPING: 2,390 net pips for an average of 80 pips per trade.

  • 2-CANDLE TRAIL: 3,578 net pips for an average of 119 pips per trade.

119 FOR 2-CANDLE YIELDED 50% MORE AVERAGE PIPS PER TRADE THAN THE SECOND PLACE FRACTAL HOPPING. This is significant concerning the issue raised in the title of the thread. Please stay with me.

Several observations:

  1. One’s exit method is absolutely critical to one’s success as a trader.

  2. My sample was limited, but extensive enough to get me excited about 2-candle. I’ll keep experimenting, particularly with 2-candle, on FT3, and then on MT4 demo. I see the real possibility of trading live soon.

  3. Results may vary significantly with the strategy that you use, the pair you may choose, the time frame you trade on - in short, with your total method; so do not “fly” with my results, but test the 2-candle, if you will, along with other methods - and if you will, please share your results.

  4. Please keep in mind the various exit methods I did NOT test, such as MA crossovers, setting take profits as tommor suggested in post 2, or one of the various PA methods, such as the one Traderjohn suggested in post 11.

Now, a final word (read: “a couple of hundred”) on the question that this thread is all about: “Move Stop Loss from Retracement to Retracement? Or Is There a Better Exit Method?” This begs the question, “What is a retracement?”

We are all aware of such definitions as, “A temporary pullback of price from the prevailing trend;” but I searched for a quantified definition so we’ll know exactly what we’re talking about. I did not find one! I am therefore quantifying it now by using the standard definition of a trend change: We have a trend change when, after price turns around, it makes two higher highs and two higher lows for an uptrend, or two lower highs and two lower lows for a downtrend. For the sake of what I’m about to share, I’m defining a retracement the same way.

It so happens that the Williams Fractal is painted on a chart after two lower lows are formed (often accompanied by two lower highs on the same candles) or two higher highs are formed (often accompanied by two higher lows on the same candles), and then turns around forming a rough mirror image. Think of the side view of two nested mandarin (cone-shaped) hats. You’d see two dots going up one side followed by a dot on top, then two dots descending down the other side. (That’s for a bullish retracement. Turn the hats upside down for a bearish retracement.) In other words, the Fractal Hopping method is really, for the most part, the retracement hopping method. It shows ALL retracements, small and large, right up to major trend changes. Therefore, the thread question is answered only when the stop loss is advanced to the candle tip of every single fractal that formed, which I did with the fractal hopping method. In this case, and according to the results of my limited sample,

THE 2-CANDLE TRAILING METHOD YIELDED 50% MORE NET PIPS PER TRADE THAN FRACTAL HOPPING (ADVANCING THE STOP TO EVERY SINGLE RETRACEMENT THAT FORMED).

Here’s the issue: Different traders may advance their stops to different size retracements, and there’s no way I was about to test even several of the possibilities. Therefore, if you’re a retracement hopper, you might consider testing the 2 candle trail method - or any other method, for that matter - against your retracement hopping method and within your particular trading strategy.

I hope this has been helpful.

And if you’ve got a kick butt exit method, why not share it in this thread? Even better, present some test results.

Happy trading all,
Norm

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16

Well done Norm.

By the way, the 2-candle trail tactic has to be very close to the 2 x ATR20 SL which I am now using (and which I lifted from the Turtles, so it has well established credentials).

17

Really? I’ll need to compare; but are you using 2ATR in a discretionary manner as I did with 2-candle? What kind of results are you getting?

By the way, I received notice of your post while I was in the middle of my last edit of my post. You may want to check my post again, but I don’t think it would make any substantial difference.

Good hearing from you again, tommor!

Take care!
Norm

18

I’m using 2ATR20 as a stop-loss on all trades, but they’re all standard trend-following positions. Tired of missing out on unrealised gains, I decided to also use 2ATR20 as TP: though this is only r:r of 1:1 obviously, less than half my trades hit the SL and I pyramid all the winners after a gain of 0.5ATR20 anyway. So far so good, too early for conclusions.

19

T, when you’re pyramiding with those take profit and stop loss parameters are you just placing your pyramid trades based on gut feeling as price moves in your favor after the .5 ATR has been hit or do you wait for a specific signal to place additional trades on for your pyramid?

KC

20

Right now I’m being very aggressive, so the first pyramid order triggers as soon as price has advanced 0.5ATR20 in my direction. When I’m looking to open a new position, I put the original entry order in and three pyramid orders beyond it at the same time, the pyramids are at 0.5, 1.0 and 1.5ATR20. I would cancel them if the TA of the trend seriously weakens but otherwise, I’m not waiting for an entry signal as such for a pyramid.

I have closed whole positions if say the first two pyramids triggered but then price stalled and was dragging along without reaching the third: but if its moving really well, I’d have to consider adding a fourth, fifth etc. I would certainly add a new entry order and a whole new series of pyramids if I got an identical new entry signal.

Aggressive but not unique - its pretty much from Turtles trading.