But is it?
Currency pairs differ a lot in volatility. In the following weekly table you can see that the red pairs are far more volatile than the green pairs. The GBP/NZD pair has a 70% change of a volatility of 600 pips a week. The EUR/GBP only has a 0.4% change.
How can anyone, with this information, justify using a stoploss or a take profit off 100 pips for all pairs? In a volatile market 100 pips might be to tight and stop you out to early. In steady markets 100 pips could be to wide and would require a higher hit rate to become profitable.
The solution is off course a volatility-based strategy, hence using the ATR by Developed by J. Welles Wilder.
http://stockcharts.com/school/doku.phpi ... _range_atr
The second thing that surprised me was that 90% of the talk is about entry’s. When do you enter the market and in what direction.
Personally I never made any money entering the market, only exiting. So why is there so little talk about exits? I used to spend 10% of my time looking for ways to enter, 40% on exits and 50% on money management.
“Cut your losses and let your profits run” is a rule that I’ve lived by for the last 5 years.
The third and last thing that surprised me was the fact that a lot of people are using ‘take profit’ exits. Why???
I can understand that if you have $10.000 in the bank and you only want to lose 2% per trade that you use a stoploss of 20 pips ($200). But why would you say, upfront, what your maximum amount is that you want to win? My maximum is always infinite. This, sometimes required, profit exit must be invented by the criminals. They want you to exit early in the trend.
So what is my solution?
My solution is the chandelier exit and the ATR ratchet exit. Both are invented by Chuck LeBeau, one of the forerunners of backtesting. Through extensive testing he concluded that the most important thing in trading is a volatility adaptive exit.
I’ve used both exits with good success in stock trading for years and I’m convinced that they can outperform any exit strategy so far on this forum. The chandelier and ATR ratchet exit are made for trend trading and don’t work for scalping. Baluda’s slopestength system could be the perfect starting point for this system.
It is getting late so I have to stop for today, but tomorrow I will explain in detail what my strategy is.
Let's assume we are trading EU, it has an average ATR(5) of say 100 pips we have a stop loss at the last swing high/low, which is 80 pips away. We want to risk 2% on this trade so we work out, with our account size, we can trade 4 lots. We set the first take profit (TP1) at ATR(5) - so in this case 100 pips away. What do we set TP2 and TP3 at and what lot size (of the 4 lots available) do we allocate to each trade?
