THE HAnDbook of TECHnICAl AnAlysIsslightly farther out to account for slippage, trading costs, etc.). The initial stop is
now functioning as a breakeven stop. As prices continue to advance, the stop may
be made to trail price until it is taken out. In such a scenario, the breakeven stop
is functioning as a protective trailing stop. See Figure 28.9.
A Type 2 stochastic exit is simply liquidating or covering (i.e., scaling out)
enough positions to achieve a breakeven state, that is, to cover any potential losses
that may arise if price reverses and takes out the stoploss, depending on whether
the trader is long or short the initial position. The initial stop is not rolled to
the entry level, but rather left in its original position. As prices continue to advance,
the stoploss may be made to trail price until it is taken out. In Figure 28.10, we see
that we are required to scale out 10 lots (or contracts) if we exited 90 points above
the entry that had a stopsize of 10 points, using the formula on the next page:
figure 28.9 Type 1 Stochastic Exit.
figure 28.10 Type 2 Stochastic Exit.