Money Management
[Stopsize Stopsize Reward Size/( + )]×total initial lotsize or contract sizeA Type 3 stochastic exit is simply entering a new lot or contract anywhere
beyond the entry level and rolling both the stoplosses to midway between the two
entry levels. Hence, if price were to reverse and take out the both the stoplosses,
the losses would be neutralized by an equal amount of profit made (in reality we
need to roll the stoplosses slightly farther out to account for slippage, trading
costs, etc.). As prices continue to advance, the stoploss may be made to trail price
until it is taken out. See Figure 28.11.
A Type 4 stochastic exit is simply a combination of Types 1 and 2. Once price
has moved a reasonable distance beyond the entry, the stoploss is rolled to break-
even, that is, the entry level. The trader then scales out some position to lock in
a profit. Hence, if price were to reverse and take out the stoploss, a profit would
be made (in reality we need to roll the stoploss slightly farther out to account for
slippage, trading costs, etc.). As prices continue to advance, the stoploss may be
made to trail price until it is taken out. The trader may also scale out first before
rolling the stop to the entry level. See Figure 28.12.figure 28.11 Type 3 Stochastic Exit.figure 28.12 Type 4 Stochastic Exit.