No loss guarantee and stop loss in Trend Hunter Strategy
No loss guarantee
In Trend Hunter Strategy, we try to guarantee no loss for our investment as soon as possible. That's why, in an appropriate time, we set the stop-loss point of trades at their entry points (Break-Even). This way, in case of a change in market direction and a pullback in price, all open trades will be closed at zero and our investment is not threatened by a loss.
Regarding that take-profit points are, in fact, support or resistance levels which may cause a pullback in price, the best time to set the stop-loss point of trades at their entry point is when the price reaches the first take-profit points. In brief, when the price hits first, second or third take-profit point (TP1, TP2, TP3), we set stop-loss point of trades at their entry point.
If first take-profit point is too close to the entry point or according to other technical factors, there seems high probability of success to reach next take-profit points, it's better to do this when the price has reached second or third take-profit points. That's because if we do it soon, it's possible that correction waves of the market result in an early and unreasonable close of trades.
In the figure, in the first buy at 2014-08-08, after the price hit the first take-profit point, we had set the stop-loss of other trades at their entry point and they were all closed at their entry point by a pullback in price. So we have taken only 40 pips of profit.
In the second buy at 2014-10-02, also in the same way, after taking 324 pips of profit from take-profit points 1, 2 and 3, there was a pullback in price and other trades were closed at their entry point.
Also, in the third buy at 2014-11-12, after the price hit take-profit points 1 and 2 and taking a profit of 236 pips, the market reversed again and rest of trades were closed without loss.
But see the result of 4th buy at the next section and in the following figure.
Use of WEMA-21:
One of the very useful and very easy techniques to find the best time for setting stop-loss points of trades at their entry point is the use of WEMA-21. (To download this indicator click this link!)
As you know, WEMA-21 is one of the most important moving averages (MA) in the daily time frame. The price can't cross it easily and it mostly causes a pullback in the price.
If WEMA-21 is after the take-profit points or the distance between WEMA-21 and entry point is long, no serious risk threatens our trades and most of the times we easily reach the take-profit points.
But if the distance between WEMA-21 and the entry point is short, to guarantee no loss, it's better to follow two different strategies in the following two situations:
- If we've got a strong entry signal from DTO or according to other technical factors, there seems high probability of success to reach the take-profit points, it's better to set the stop-loss point of trades at their entry points when the price has crossed the WEMA-21 line for an ATR of 264 days. That's because if we do it soon, the correction waves of the market may cause an early and unreasonable close of trades.
- If we've got a weak entry signal from DTO or according to other technical factors, there seems no high probability of success to reach the take-profit points, it's better to set the stop-loss of trades at their entry points once the price hits the WEMA-21 line.
Accepting the loss and exit
In Trend Hunter Strategy, when the entry zone is broken, we accept the loss and close our trades with a loss. After entering trades, if we have not yet set the stop-loss point of trades at their entry points and market breaks the ending level of entry zone, we must accept that we have lost and must close our trades with a loss.
Break of entry zone is when a whole candle in the daily time frame is formed behind the entry zone. Be careful that at least 80% of the body of the candle should be behind the entry zone and this candle must be a "Health Candle".
At 2015-01-02, we entered the market with buy trades. There was a pullback in price after hitting the first take-profit point and earning a profit of 45 pips. As we had not set the stop-loss point of trades to their entry points, these trades were losing and finally at 2015-01-15 when a whole health bearish candle was formed below entry zone, we accepted the loss and closed the rest of trades.
In this way, Trend Hunter Strategy uses an accurate stop-loss strategy (Soft Stop-Loss) instead of specifying an accurate stop-loss point (Hard Stop-Loss).
Pay attention that stop-loss point is meaningless for long-term strategies and it is commonly used in short-term and intraday strategies. Of course, this doesn't mean that we can't calculate the probable loss, before entering trades. The distance between the probable stop-loss point and ending level of entry zone will be equal to the average length of the bodies of daily candles in the past year.