Mark Thomas –Trade On Track
This is the last edition of the Time Base Strategy Series– Make sure you read all the articles by clicking here
Having covered the entry, initial stop loss and the money management rules for our time-based forex trading strategy, it makes sense that our exit rules should be time-based too. In this article I will explain when to move the stop loss to a safer position and also when to exit the position if not stopped out beforehand.
I mentioned earlier on in this article series that too much emphasis is often placed on the entry rules, with little regard to the take profit or exit strategy. This time-based method is no exception. If we exit too early or set our profit target too close, we don’t capture as many pips as we could have. If we leave it too long to exit, our profits may dwindle and we again miss out. Through many tests, I believe I have an optimal exit strategy worked out for this particular trading method. It may be something to keep in mind for other intra-day trading strategies on the New York session too.
One thing I did test which didn’t work out as profitable in the long run, is to take some profits part way through the trade. Many traders like to grab some profits at a mid-way point then move the stop loss to a break-even price, so that they increase their overall win ratio. Psychologically, we love to be able to lock in some profits and then let the rest ride and perhaps make even more profits. But, through my testing of this particular strategy, I have found that it’s best to just collect all the profits at the end rather than some part way through and the rest at the end. I suspect this may be true for many trading methods, so just keep it in mind when doing your own tests.
With the NYTime exit strategy, we do move the stop loss to a break-even point (actually, slightly better) during a certain point in the trade. This prevents losses from that point on, but we don’t actually take any profits at that time. We wait until the stop is hit or until our pre-defined exit time.
For our stop loss move rules, we have two things to consider:
At what point (when) do we move the stop
To what price do we move it
To answer the first part:
We move the stop loss once price closes past our first target.
Our first target is defined as 1.5 times the risk, away from our entry price.
The risk is the difference between the entry price and the initial stop loss position.
Example 1: If we have a long trade where we enter at 1.2345 and we’re risking 20 pips, our first target point will be 1.2375 (which is 1.2345 + (1.5 * 20pips)). If during our trade we have a 5 minute candle close ABOVE 1.2375, then we will move our stop loss.
Example 2: If we have a short trade where we enter at 1.3542 and we’re risking 15 pips, our first target point will be 1.35195 (which is 1.3542 – (1.5 * 15pips)). If during our trade we have a 5 minute candle close BELOW 1.35195, then we move our stop loss.
So, as soon as we enter the trade and we place our initial stop loss, we can calculate when we will have to move our stop loss (because we know our risk at that point). You can draw a horizontal line on your chart at this “first target” point to make it easier to track. Once you have a 5 minute candle which closes past that first target, you know you have to move the stop loss.
The second thing to consider was WHERE to move the stop to. Through lots of testing I have found the most effective place to be:
0.4 times the risk away from our entry price.
Example 1: Using the same example as above, we enter at 1.2345 and our initial stop is at 1.2325 (20 pip risk). We will move the stop once we have a close above 1.2375 and we will move our stop to 1.2353 (1.2345 + (0.4 * 20)). That is, we lock in 8 pips of profit.
Example 2: We entered short at 1.3542 with an initial stop at 1.3557 (15 pip risk). Once price closes below 1.35195 we will move our stop to 1.3536 (1.3542 – (0.4 * 15)). That is, we lock in 6 pips of profit.
Great, we now know when to move the stop and to lock in some profits. But, when do we exit the trade?
We exit at exactly 1:50pm NY Time. So, wait for the close of the 1.45pm 5 minute candle, then close the trade if it hasn’t already hit the stop loss. Why 1:50pm? Because that’s the time that works best historically across the last 25 months that I’ve tested. Maybe all the big bankers have gone to lunch by then and price struggles to make it any further for the rest of the session. I don’t know the exact reason, but that seems to be the optimal place before price starts to pull back and consolidate a bit before the next session. Yes, you will get lots of days where price peaks at 10:00am or 11:00am or 3:00pm or anywhere else, but on average: 1:50pm is the best time to exit.
So, if during the day your trade has not yet hit the stop loss, you must exit at 1:50pm. In most cases this will be a winning trade, but not always. It’s quite possible for price to just meander along for the whole morning and not get very far. It may not get far enough for you to move the stop loss to lock in profits, and it might not move back far enough to knock out your initial stop loss. So, win or lose, exit at 1:50pm.
Well, that wraps it up for NYTime. I’m happy to take any questions you have, just post them on this blog and I’ll respond as soon as I can. In the next article I will discuss trading discipline, which is critical for implementing a strategy such as NYTime or any other trading method.
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