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Sticky Trailing-Profit & Fixed-Loss Stop Combo
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JimDean
Posted 7/25/2011 4:23 PM (#2620)
Subject: Trailing-Profit & Fixed-Loss Stop Combo



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For a thorough treatment of the inputs related to Units of measure (such as ATR), and for the Adjustment reference-levels (for entry and later bars), please click here.


The combination of the canned Trailing Profit Stop and the Fixed Loss Stop is one of the most versatile, understandable, potentially profitable (depends on settings), and flexible stop-plans. This thread "works over" the inputs of those two stops, both explaining them in more depth than OT's doc's do, and illustrating them with annotated chart snapshots.

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The Fixed Loss Stop (FLS) is the simplest of all stops. Its value is set at the beginning of the trade, at a user-specified distance away from some user-specified initial price-point. It STAYS at that value for the duration of the trade. It provides a "fail-safe" level that should be set as a broker stop during your trade. It shows up by default as a solid red line ... I prefer to change it to another color such as Orange (via Chart Properties > Stops), so that it is easily distinguished from the many other red objects on the screen.

The stop-gap input for the FLS is labelled "Stop Level" in the parameters screen. It is a multiplier (and can be optimized). It is applied based on the Units selected (see linked article).

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The Trailing Profit Stop (TPS) is more complex than the FLS, but it offers a "hands-off" exit method that usually protects a reasonable proportion of your profits. It has two important inputs: "Threshold" and "Cushion". These terms are used very extensively by Nirvana for their stops - and although they don't always mean exactly the same thing from one stop to the other, it's a good idea to get used to the concepts and rationale behind them. Both of them are Multipliers, similar to the FLS's "Stop Level" discussed above. They are applied to the Units you've chosen (see linked article).

The Threshold is a point that must be reached by the price, during the course of the trade, in order for the TPS to become active. In this case, the "price" refers to the Close price of a bar - not its extreme H or L. The Close must cross the Threshold (in the profitable direction) ... after that, on the next bar, the TPS becomes "live". Prior to that time, you'll see a "preliminary" TPS line plotted on the chart - by default it's a gray dashed line. Don't be fooled by the presence of this line ... when it's dashed-gray, it is NOT protecting your trade. But after the Threshold has been crossed, the TPS line becomes active ... it changes to a solid line (purple by default), which I usually customize to a Blue color (via Chart Properties > Stops) so that I can see it better when it's surrounded by black background, or by red or green bars.

The Cushion input is what many refer to as the "stop-gap" between price and the stoploss level. The input value is a multiplier for the selected units. For a long trade, it is subtracted from the reference price (see linked article re reference price options), and it's added to the ref price for a short trade.

The TPS is a "ratcheted" stop. This is described in the linked article ... it means that the absolute stop-price never "backtracks" ... a Long stop can stay the same price or go up as the trade progresses, but never can go down (vice-verse for Short stops). When any portion of a bar crosses the TPS, the exit order is fired.

---------------------------------------------

You can force the TPS to be IMMEDIATELY active by setting the Threshold parameter to ZERO. If you do this, you don't have to pair the TPS up with FLS (no need to protect the TPS at the beginning), and the TPS can become your Broker stop. HOWEVER, if you go this route, you will likely find that you either get stopped out TOO SOON since your Cushion is too tight to allow the initial wiggles at the outset of the trade to pass ... or you may find that you GIVE UP too much profit at the end of a successful run, since you made your Cushion too loose, so that you could solve the first problem. This is why using a non-zero-Threshold TPS with an FLS is such a good combo.

Another trick to consider when using TPS with trend strategies is to provide for scaling-out of your trade gradually. First, set up an FLS in your Trade Plan. Then, add a TPS that has a relatively small Threshold (satisfied fairly quickly), and a relatively tight cushion. Take out a third of your position with this exit, hopefully capturing the initial, fastest thrust. After that, establish another TPS with a much higher Threshold and a typical Cushion, which is less likely to activate until after the initial retracement is complete, and tie the rest of your position to that exit. You might even consider a third layer, with a really distant Threshold and a tighter Cushion to get the last potential leg of the trend.

=========================

The following posts in this thread provide annotated charts to illustrate the impacts of the various inputs on how the FLS and TPS behave.
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JimDean
Posted 7/25/2011 4:41 PM (#2621 - in reply to #2620)
Subject: Trailing-Profit & Fixed-Loss Stop Combo



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The first example-chart not shows visualizes the three input Multipliers for you. There is a short trade and a long trade on the chart. The trade plan has the combo of a FLS and a TPS using a simple Orders Block.

The gap-distances represented by the Multipliers (in this case, multipliers of ATR), are in violet for the short trade and yellow for the long trade: "FL-SL" means Fixed Loss stop, the Stop Level parameter; "TP-T" means the Trailing Profit Stop, Threshold parameter; "TP-C" means the Trailing Profit Stop, Cushion parameter. Orange lines are FLS, gray and blue lines are TPS.

In this snapshot, I've set up the FLS, 3 ATR's away from the Current (Entry) bar's Open price (which is shown with a dashed horizontal line in the graphic). This is a pretty reasonable "default" to use, btw.

The TPS is tighter than the FLS, with a Cushion only half as far away (1.5 ATR's). It requires a profitable Close to have passed 2 ATR's beyond the Entry bar's Open price, before the stop goes live. These values are reasonable, but a little on the "tight" side for some people's taste. I like them because they take me out of bad trades fairly quickly. It is advisable to have the Threshold be a little larger than the Cushion ... if the Cushion takes you out right away after being activated, this gives you a good chance of breaking even.

==============================

Note that for all these examples, the exits are set for MOC of the current bar. That's arbitrary. MOC through Stop would be a more aggressive choice, while a simple Stop Market is more protective. For this kind of strategy (based on a MV2-C system and no filters), MOO is unwise since it would take you out too late in the many bad trades this simplistic strategy creates.

(Canned TP & FL - ATR, O+C (defs).png)



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Attachments Canned TP & FL - ATR, O+C (defs).png (66KB - 6 downloads)
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JimDean
Posted 7/25/2011 4:55 PM (#2622 - in reply to #2620)
Subject: Trailing-Profit & Fixed-Loss Stop Combo



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Now we'll move a bit faster (less verbiage). The next four snapshots show the same strategy on the same symbol, with different settings for Reference Level adjustments and Units of measure. You can see the changes circled in brown, just below each chart.

Why did the second chart have poorer (looser) exits than the first example? It's because in the first example, I used the Close price for ongoing adjustments, while the second one used High\Low. Review my comments in the linked article ... using Close tends to tighten up the stop.


(Canned TP & FL - ATR, HL.png)



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Attachments Canned TP & FL - ATR, HL.png (58KB - 8 downloads)
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JimDean
Posted 7/25/2011 4:58 PM (#2623 - in reply to #2620)
Subject: Trailing-Profit & Fixed-Loss Stop Combo



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This third chart really jumps out as being different. So let's try to figure out WHY.

The TPS for the short trade never turns on, since it's THRESHOLD value is a LOWER price than before. Why? Because the Entry stop level is based on the Prior bar's Close, rather than the Current Bar's Open. If you examine the chart, you'll see that the close of the Signal bar is about 30 cents lower than the Entry bar's open. That was enough ... barely enough ... to prevent the close of the final red bar of the downtrend to break through the threshold ... so the stop never went active. Net result - the trade ended by using the "fail safe" FLS which was three ATR's back from the Entry. OUCH. And, to add insult to injury, the exit was so late that we missed the entry to the long trade ... this is not a "fluke" by the way. It's fairly common for the Entry bar to slightly "retrace" the action of a signal bar. So, I tend to avoid using the "Previous Bar Close" option for strategies that tend to fire in "tight snaky" price-action regions.



(Canned TP & FL - ATR, C+C.png)



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Attachments Canned TP & FL - ATR, C+C.png (58KB - 6 downloads)
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JimDean
Posted 7/25/2011 5:05 PM (#2624 - in reply to #2620)
Subject: Trailing-Profit & Fixed-Loss Stop Combo



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This chart is provided to show the use of PERCENT rather than ATR. I had to fiddle with the percent inputs a bit to get a couple of trades that looked sort of like the initial run ... I used 5% for the FLS Stop Level fail-safe, and 2.5% (half, just like the original 1.5 was half of 3) for the FLS Cushion. I pushed it up a little to 3.5% for the Threshold.

The main thing to remember about using Percent instead of ATR is this:
If you are trading a list of stocks that have a wide range of prices (ie some $5 stocks, some $50, and some $500), it is UNWISE to use percent. Generally, you'll want a smaller percentage for the expensive stocks and a bigger one for the cheap stocks. But these canned stops don't know how to "auto-adjust" for that. (You can do it in OLang, however).

ATR is generally "safer" if you are looking for trades that involve between 10-40 bars ... the ATR-based volatility is "normalized" to the stock regardless of price in those cases.

(Canned TP & FL - Percent, O+HL.png)



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Attachments Canned TP & FL - Percent, O+HL.png (59KB - 7 downloads)
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JimDean
Posted 7/25/2011 5:11 PM (#2625 - in reply to #2620)
Subject: Trailing-Profit & Fixed-Loss Stop Combo



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Final example ... this one uses POINTS as the Units input. As mentioned in the linked article, Points is IMHO the LEAST useful of all the Units options. If you're scalping, it can make sense, as long as you carefully adjust it ahead of time, scaling it to the actual price of each stock individually. This is practical for fast day-traders who traditionally work with a handful of stocks that they become "buddies" with. You'd set up a different Trade Plan for each different stock.

POINT make sense to use, if your typical hold time is less than about 5-10 bars. ATR doesn't provide as useful a resolution for "scalping". It will work OK, and SHOULD be used with a large generic focus list. But for extremely fast trading, consider using POINTS.

Again, for this example, I "played around" with the inputs to find some values that provided the two trades. They're not intended to be "comparable" to the first three snaps above.

(Canned TP & FL - Points, O+HL.png)



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Attachments Canned TP & FL - Points, O+HL.png (60KB - 11 downloads)
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SteveLuerman
Posted 7/28/2011 4:43 PM (#2660 - in reply to #2624)
Subject: Trailing-Profit & Fixed-Loss Stop Combo



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Jim - a nit in post 7/25/2011 3:05 PM (#2624 - in reply to #2620) (hope you don't mind my review comments to either correct this, or find out that I don't understand what you wrote).

In this paragraph, I think you meant "TPS Cushion" rather than "FLS Cushion":

"This chart is provided to show the use of PERCENT rather than ATR. I had to fiddle with the percent inputs a bit to get a couple of trades that looked sort of like the initial run ... I used 5% for the FLS Stop Level fail-safe, and 2.5% (half, just like the original 1.5 was half of 3) for the FLS Cushion."

Steve
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