I always considered a "stop loss" as a capital conservation method.. If you get into a bad trade and get right out with min loss, you are conserving capital. .You know, conserve your capital so you can trade again tomorrow..Perhaps I misnamed it, but it does work and got me out of a -2 -3 -2 -3 -2 trading situation yesterday. (I am still looking at what went wrong) 24 trades really quick....
Depending on your trading strategy, stop loss might or not be a capital preservation method. You know what newbies are being taught: full leverage and tight stops 7-10 pips from the entrypoint. When trading like this, the market is basically random and stops touched all the time until you're wiped out... Now with trailing stops, that's another story - stops may cut earnings earlier, but at least they mark profits. .. The key is small position sizing and hedging, cause every trade has it's own horizon and story...so a greater number of trades become potentially winners, simply by allowing yourself more space to move, and instead of closing losing trades you hedge while in the sideways market until main trend resumes...
I know what hedging is in the US markets, where you might buy an option to preserve your gains in a stock you own... but how do you hedge in the currency market?? I also know they use the fx to hedge their foreign investments... but I sure don't understand how you can hedge within the fx market... aren't you either in or out of a trade?
You know several months ago when I was striving to understand why I was losing I
thought the same about hedging, but I read a pdf book which knocked my socks off
and made everything clear (Dirk du Toit - "Bird Watching in Lion Country")
( Contact me at fxeconomist@yahoo.com if you want it ). Even if he dissavous automated
trading, and his particular discretionary trading method is very strange , 90%
of what you learn in the book is applicable to automated trading... It's a little
bit harder for me to explain you what I understood, since it's a "satori"-like
experience. .. Suppose you have a longer bearish trend with a trade on it , entered
by the sistem on one particular criteria (say some MA cross on M5 chart). If at
some point the market has a somewhat stronger bullish countermovement, don't close
the first trade, just open the second (say MA cross on M1 chart) . At the end there's
a great chance that both trades to be winning: the first trade is NOT stopped by
the countermovement, and the countermovement is gained by the second trade. So
if the market walks from upper A point to lower B point the result = ~A-B+Countermovement
. If this is proper applied, the results should be similar to walking on the derivative
(remember that limits example from highschool about how much the distance between
A and B points is growing when the measurement unit is smaller). If you make the
same thing with 3 trades, 2 short and one long between them, this is much harder
to code in the EA, as the first trade criteria is superseded by the second. If
you use hedging every trade closes when its closing criteria is match. Many criterias,
more trades. .. as the bullish/bearish signal is getting stronger, meeting more
criterias, the net bullish/bearish position is increasing.. Say the system opens
more and more trades the same way. When it is over, it starts reversing them...
So basically when the market becomes sideways the net position should be almost
0. Then the market becomes trendy again and net position increases... This is basically
my theory. Now I'm trying to make an EA for this... P.S. Another interesting article
linked to this idea is here: http://www.streetauthority.com/terms/multiplemovingaverages.asp
my email is billy@learnrealestate.us could you send that to me?
(it appears my email server is on someones black list cause it says it is a dynamic
ip... which it isn't)
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Preserving capital in the forex market.
Being new to this autotrading, I desired a way to "Catch" this critter if it ran away (because of some unforseen condition in the market that might hit a weak point in my expert) and started losing my capital while I was asleep...I thought I might set a limit to what I could lose over night.. possibly $100, using $1 pip.
(This goes before the trading section) So, I set up the variable for my min.
I have run this, and sure enough when the min hits, it dumps the trade and shuts down with the message..
I am sure the mins, size, etc would have to be modified by each person.
waddauthink?