With trend following strategies, I reckon how you manage stop losses is at least as important as both getting in and setting profit objectives
The moving average and trend break strategy I posted on 26 July, reached its first target and after a corrective bounce and is now heading in the direction of the second. I thought this may be the time for a post on approaches to moving the stop loss.
4 Hour Chart
The initial set up involved selling on a break below the support around the trend line and 50 period moving average. The strategy involved a scaled profit approach in which half is bought back at the 200 period moving average (green line). Click here to read details
The target discussed for the 2nd half of the position was a 38.2% retracement of the last major move. I've shown this on the weekly chart to give a bit of perspective.
At the time the 40 week (200 day) moving average was close to the 38.2% level but it's now rising above it. Even so, the target is left at the 38.2% level based on the observation that corrections have a decent chance of getting at least this far.
Moving the stop loss
One approach to stop loss management now is to move it down behind the last intermediate trend peak on the 4 hour chart. This is shown on the first chart.
This approach is based on the following general philosophy:
- The purpose of the split profit approach is to improve the success ratio by taking some profit and turning a fair number of trades that might otherwise move back to the original stop into breakeven/small profit situations. This allows scope to leave plenty of width on the stop loss with the second half of the trade, giving the down trend every opportunity to run in your favour
- That said there is no point in staying in the position after there have been clear signs that the downtrend has finished
- The downtrend being followed is an intermediate trend on the 4 hour chart. This made a lower high at 96.33 and then made a lower low when it moved below 94.72 yesterday. A move past the 96.33 high would be a big picture failure warning for the downtrend so the stop is moved behind that level using this approach.
Using this approach there may be more opportunities to move the stop down behind new peaks or overlap points if the down trend continues to unfold. Some traders may also run the position past the 2nd target but moving the stop lower to protect profits if things get that far.
Hint - Choosing your stop loss trigger
Our Next Gen trading platform allows you to choose whether your stop will be triggered by being hit by the bid, the offer or the mid- price.
You can do this via the Preferences function show below. There is no right or wrong in this. Personally, I prefer the midpoint for stop losses because with technical trading, my preference is to be sure the stop is triggered at a traded price on the chart. While this will usually be the case where a buy stop is triggered by the offer but there might be times when it is not, especially if the bid/offer spread widens a bit in quiet periods