Trend Analysis
just below the previous trough in a long position. The stops are set to trail price
by advancing to the next lower peak in a downtrend or to the next higher trough
in an uptrend. Note that the divergence in the MACD helps to warn the trader of
a potential reversal.stopsizing issues related to stop placement
A stop is usually placed just below significant troughs for long positions in an
uptrend and just above significant peaks for short positions in a downtrend. For
entries too far from a significant peak or trough, a stop may be placed at some
multiple of ATR or standard deviations away from the entry.
Stopsizes associated with barrier entries will always be approximately the
same size, as the significant peak or trough is usually the point of entry itself. The
stoplosses will therefore be placed just behind the barrier, depending on the extent
of price filtering employed.
Stopsizes associated with breakout entries present a completely different scenario.
Stopsizes for breakouts will vary with each entry, since the significant peak or trough
associated with each entry may vary in distance from the entry. See Figure 5.39.
This presents a significant problem to traders risking a fixed percentage or
fixed unit size per trade. The varying tradesize associated with the changing stop-
size for breakout entries will affect the performance of the system, especially if:■ (^) A fixed percentage of current capital is exposed per trade and narrow stops
are taken out frequently, causing significant loss.
■ (^) A fixed percentage of original capital is exposed per trade and wide stops are
taken out frequently, causing significant loss.
To resolve this issue, we use proportional stopsizing, which was first intro-
duced by the author in The Wiley Trading Guide Volume II. Proportional stopsiz-
figure 5.38 MACD‐Filtered Stochastic Signal Line Crossover Entries on the EURUSD.
Source: MetaTrader 4