Now we’ve decided that the stop loss should be placed 1 ATR away from the
entry price and that the maximum trade length should be six days. It remains to be
seen whether the profit target should be at 1 or 1.5 ATRs. In this case, I decided to
place it at 1.5 ATRs, which is slightly contradictory to what we learned from
Figures 20.1 to 20.3. However, had I placed the stop at 1 ATR, the risk–reward
relationship going into any individual trade would have been 1:1. Going with a
higher profit target for an initial risk–reward relationship of 1.5:1 (or 3:2) will
demand a lower percentage of profitable trades.
This makes sense when looking at Figures 20.7 to 20.9, all of which suggest
that the number of profitable trades will fall somewhere in the 40 to 50 percent
region. Note, however, that these results were derived from testing both sides of
the market (both long and short trades). But because we already know from Part
2 that the short side most likely won’t perform as well, the results for the long
side most likely will be better than indicated by these charts. Hopefully, the
results also will be better than where we left off in Part 2 (at this point I honest-
ly don’t know).230 PART 3 Stops, Filters, and Exits
FIGURE 20.6
Maximum trade length of six days.