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Hi Guys
Forum on trading, automated trading systems and testing trading strategies
What is the safest (but most profitable) way to set a stop loss?
Ryan L Johnson, 2025.01.18 19:17
If you use a strategy (instead of gambling), then there are rules to follow. And within those rules, there are necessarily both trade entry conditions and trade exit conditions and/or stops. Generally, there are multiple entry conditions to be satisfied in any given strategy. For example, let's say you're using an 8 period EMA and a 21 period EMA for crossovers, and a 20 period RSI oscillator for 30/70 level OB/OS, all for entries.* The underlying idea is to capture short-term price swings based on the EMA's while filtering out "false" entries using the relatively slower RSI. So if the EMA's are a statistically reliable way of determining short-term price direction, then simply omit the slower RSI filter and reverse the EMA conditions for exits. IMHO, much of profitable trading is simply having your exit conditions specified faster than your entry conditions. Of course, it's always responsible to set a trade server-side "fail-safe" stop a good distance away from the entry price (to potentially execute if you lose your trade-server connection, internet connection, or electricity altogether).
* This is not an actual strategy that I have tested nor traded, but I do use the general faster exit conditions principle for profitable live trading.
You can analogize the above logic with the mid-line and/or bands of Bollinger Bands for entries and exits if you study/backtest historic price data and your own logic is statistically profitable.
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