Dear Traders,
Today I want to share my Stop Loss trading strategy and my product Spike Protector EA that I have created to tackle 2 main problems traders have when placing Stop Loss: 1. What size buffer I need to keep my trade safe? 2. How to NOT get STOPED OUT on market spike?
I have spend countless hours (even days) to find the safest distance for my Stop Loss while still keeping good Risk:Reward ratio and found that by using smaller Stop Loss I can drastically improve my Risk:Reward ratio and in return increase my profit at end of the month. However, having smaller SL can lead to perfectly good trade getting Stopped out on market spike and reduce your overall profit drastically since you missed out on profit on good trade plus you recorded loss from the spike. In essence you get double Loss, 1st you missed on profit and 2nd you recorded loss.
To avoid this I use stop loss technique that involves closed bars only. I would allow price to spike past my Stop Loss level while the bar is open, but close the trade for loss only when bar closes past my Stop Loss level.
Let me show you an example:
I typically trade on H1 chart and one of my favourite trades are price bounces of Support/Resistance levels. Here EURUSD is crated strong Support @ 1.3500 Round number on H1 chart with 3-4 bounces of the same level. So it makes perfect sense to Buy EURUSD at or near 1.3500 with SL just bellow last swings and bellow this Round number and strong Support 1.3500, however standard hard SL would have been hit on the market spike just before the large green candle so you would have been stopped out on otherwise perfectly good trade. Now if you notice price never closes bellow 1.3500 and if used only closed bars Stop Loss technique this trade would have hit full profit with large 1:10 Risk:Reward Ratio. Since you can place much smaller SL, in this case just bellow 1.3500 RN so your SL would be no more than 10 pips.
When you think about it - its very easy for price to create spikes and take you out, as all it needs is few large orders, but for price to close past important Support/Resistance level is much harder as it will need much more orders to do that and will require traders to be happy with the price so nobody is biding or selling the market against it. If price closes past Support/resistance levels, it then gives me the signal that this Support/Resistance level is no longer valid so my trade is no longer valid or the probability of this trade to work has so diminished that its not worth keeping the trade in. Using this Stop Loss technique its much easer to pick a spot where your trade is no longer valid comparing to conventional hard SL that can be hit just on market spike.
I have been trading this way for while, but since using this technique requires been at computer every time bar closes its not very practical, so I created EA that does it for me and never looked back. I place my trade, tell EA to get out of the trade if price closes past certain level on H1 or M30 chart and thats it, I get on with the rest of my day. Its takes all the emotion out of the trading and I can be my productive in my Stop Loss placement and my overall profit has increase nearly 2 times since I can now use smaller Stop Loss. But remember if you do practise this Stop Loss technique, always have a emergency hard SL in the market in case of large unexpected reversal. I typically place it 2-3 times further away then my EA Stop Loss so I don't get Stopped out on spike, but still have protection in case some total reversal occurs on news on other unexpected event.
If this is Stop Loss technique interests you can read more about on my Spike Protector EA products page here:https://www.mql5.com/en/market/product/6021, I have written 10 page owners manual about it.
I have also FREE DEMO version for testing on NZDUSD pair here: https://www.mql5.com/en/market/product/6036
I'm open to any questions or suggestions, feel free to ask here or on my Facebook page: https://www.facebook.com/pages/Spike-Protector-EA/858301524195096
I also support MQL5 community and offer generous 30% commission for anyone who thinks my product is great and would pass it on to friends and family.
Cheers,
Ivo
