The initial stoploss is placed at (1). Then once the next bar is formed the stoploss is placed at(2). The formation of the next bar makes us place the stoploss at (3) – this stoploss is finally hit and we are out of the trade.
Unfortunately we can see that the market carried on down…
A 2-bar trailing stoploss, or 2-bar TS, on the same chart would give us almost the same exit as the above scenario. But instead of exiting when price went above (3) – we would exit when price went above bar (2).
For a 2-bar TS, when we are in a short trade, our stoploss goes above the HIGHEST of the last two bars.
Let’s see this example with a 3-bar TS:
Using a 3-bar TS would keep us in this particular trade for a decent move. But remember – a 3-bar TS, although got us more profit in this trade, can result in less profit in another trade.
So that’s the trailing stoploss exit plan. Have a look back in some charts – I’m pretty sure you will be impressed at how effective it can be!
Like I said earlier, trading exiting can be a bit random (although lots of people like to think it isn’t – and are kidding themselves!), so as long as you can stick to a decent exit strategy then your good.
Here’s an example of the x:1 in action (using the previous example):
I’m sure you’re thinking, “what is this ‘x:1’ rubbish he’s talking about?!”… but fear not – I shall now explain.
The ‘x’ is where you decide how much profit you want to take. For example, if your initial stoploss was 10 pips and you decided to take profit on your trade at 10 pips also, this would be a 1:1 take profit.
If your initial stoploss was 10 pips, and you decided to take profit at 30 pips, then you would be using a 3:1 take profit.
Now THAT is simple; too simple? No, nothing can be too simple.
Now that’s the two exit strategies done and dusted… let’s hit some examples before we hit the beers!
Some Trade Examples
The strategy is pretty simple – but I thought I’d throw in some examples just to make sure you “get it”