Price correction is a slight trend reversal within the main direction. Even the strongest trend has local corrections that, depending on their depth, can be removed by traders’ feet. Large investors even have such a technique of “haircuts” for beginners who put on short stops. Its essence is in fixing the position, because of which there is a rollback. Removing the early stops makes the rollback even greater, after which the position is recruited again. The following strategy gives an example of how to use such kickbacks and not fall into the trap of short stop loss using a trailing stop order.
Strategy using a trailing stop order
Work on this strategy is carried out on the correction to the short impulse price movement with position fixing on the order trailing stop. Despite the fact that this is a quick temporary pullback, the scalping strategy does not apply.
The tactic is based on the MRO2 indicator, known in narrow professional circles. It shows the ratio of the difference in the closing price of the current candle and the candle shifted three periods back to the average price movement period for a fixed number of the last candles (set in the settings). The indicator can be downloaded for free exclusively for the MT4 and MT5 trading platforms regardless of the broker.
- timeframe – M30. Increasing the timeframe is not recommended;
- The currency pair on which the strategy was tested – GBP / USD;
- period MRO2 = 7, level = 3.
And a few words about the trailing stop. It differs from a regular order in that it follows the price in the direction of the main direction, but does not move back. To achieve the minimum level of profitability, a part of the position is fixed, a part is insured by a trailing above the breakeven level (or at its level). Trailing is a program that automatically sends an order to transfer a stop loss to the server if the potential profit exceeds its level plus the step set. True, it needs a VPS server, otherwise the trailing will not work.
Conditions for opening a long position:
- MRO2 has risen above level 3;
- the price of the last few candles went down confidently;
- the indicator went down below the level of 0.1 within 10 candles after drawing the vertices above the 3rd level.
With a short situation in the same way: MRO2 should also rise above 3rd level, but the price should go up. As soon as MRO2 drops below 0.1, under similar conditions, we open a position.
The target level of profit is better to put a growth of no more than 10 points, then close 50% of the position and place a stop order with a trailing stop in 10 points increments. If the broker has a wide spread, it is better to take a risk and trail the entire 100% position without partial exit from the market.
The indicator levels can be changed. Reducing the level, for example, to 0.06 will reduce the number of signals, although it will not add much accuracy. You can reduce the number of candles analyzed (period), but this will increase the risk of false alarms. There is no universal strategy, the indicator parameters are selected for each currency pair separately, depending on the market situation.