Exit strategy #6 (Tight stop timing with CCI)
Submitted by Edward Revy on September 29, 2009 - 16:56.
Today's challenge: how to exit a trade in time without leaving much on the table.
Today's system: reveals how to use CCI indicator to know where to pull the trigger and launch aggressive price chasing.
The idea is actually pretty simple, like all good ideas: we need to figure out when price gets "carried away" in a rapidly developing momentum and from that point we'll be looking to aggressively protect our gains while giving the market a chance to progress till it runs out of steam and inevitably reverses.
To illustrate the strategy I've chosen 15 min EURUSD and 30 CCI.
For other pairs and other time frames, you can figure out the settings quite easily with a few minutes observation; there is no golden rule, just your perception of the market. I encourage you to experiment! If you find a good combination, share it with other trader here.
Back to the point now:
On the screen shot below let's first take a look at Parabolic SAR (0.1, 0.1). In this example it represents a regular trailing stop trading: a trader simply places a trailing stop behind each new SAR dot, until finally the stop is hit.
Now we move to CCI.
We are interested in CCI when it goes above 100 (overbought) and below -100 (oversold). Before that we happily trail our stop with whatever indicator we have, in our example it is a Parabolic SAR.
So, after opening a trading position we are trailing our stop with SAR indicator, but then later there is a signal from CCI -> CCI hits 100/-100 mark. We react to it by abandoning our old trailing stop method/indicator and instead introducing a candle by candle trailing as illustrated on the screen shot above. Circled in purple are the moments when we switch from trailing stops by SAR to trailing stops by candlesticks (e.g. behind each newly closed candlestick). We do so candle by candle till we get stopped out.
That's it. We get stopped. There will be a new trade, another stop trailing until CCI signals that its time to limit risks and protect profits if any.
This exit strategy prevents emotional trading, stop guessing and other fears related to protecting profits while letting a trade run. It shows how to control the situation when market accelerates and/or prepares to reverse.