CHFJPY ALERT:
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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.