Friday, February 24, 2012

Time difference with the Coin Flip account Part 2

I continue talking about what I found with the demo forex trading and what changes I plan to make.

EDIT: At the time this blog entry was posted I had a Youtube video here. That has been removed but I want the rest of my content to be remain. Nothing hidden no past mistakes ignored. All out in the open.

Static Stop Loss order vs Trailing Stop limitation with MT4
I used the term trailing stop and stop loss back and forth but I want to be sure everyone is clear about the differences as far as it pertains to Metatrader 4 (MT4).

MT4 software interacts with a broker's software. It can place a trade, place a profit stop, and place a regular stop loss order with the broker and that is stored on the broker's servers. The local MT4 client installed on your computer manages a trailing stop. Once a trade hits the MT4 trailing stop it sends a market order to exit your trade to your broker software. From your broker's point of view there never was a trailing stop, it only received an order to exit the trade. The danger is in if your computer losses its connection to the broker server you have no protection if you were only relying on the trailing stop. The broker server sits there watching your account go bankrupt wondering when you are going to tell it to stop.

What MT4 will do though is send a stop loss order that is static in price. This appears on the Oanda software when I look at it through their software. The trick will be in programming MT4 to check the amount of profit and move the stop up to match making a synthetic trailing stop loss but it is still technically a regular old stop loss order as far as the Oanda server is concerned. Then if my connection is lost at least I do have something out there protecting me.

Shrinking Synthetic Trailing Stop
I also want to go into a bit more detail about how the synthetic trailing stop will shrink as the trade becomes more profitable because in reviewing the video I kept using decrease, shrink, increase in possibly confusing ways. Right now with a 50 pip trailing stop I will always give up 50 pips. The following chart shows how many pips in my favor a trade goes before reverting and hitting its trailing stop and the net amount of pips. The 100 mark hits the profit stop so the trailing stop is not triggered.

100 pips profit, 0 TS, 100 net pips
90, 50 TS, 40
80, 50 TS, 30
70, 50 TS, 20
60, 50 TS, 10
50, 50 TS, 0 net pips break even point
40, 50 TS, -10
30, 50 TS, -20
20, 50 TS, -30
10, 50 TS, -40
0, 50 TS, -50

Now my plan is that for every 4 pips of profit I will decrease the size of the trailing stop by 1 point, making it small so that the more profitable I get with a trade the more I will keep.

100 pips profit, 0 TS, 100 net pips
90, 27 TS, 63
80, 30 TS, 50
70, 33 TS, 37
60, 35 TS, 25
50, 37 TS, 13
40, 40 TS, 0 net pips break even point
30, 43 TS, -13
20, 45 TS, -25
10, 47 TS, -37
0, 50 TS, -50

This does a number of things.
1: It keep me in the trades that go immediately against me the same amount of pips so that I can survive the volatility and hopefully make it to the 100 pip level
2: The smaller sized losses are lessened but still give ample room, 43, 45, 47 pip stop losses are still a good level. A few pips shaved off each loss will add up.
3: The break even point is now 40 pips vs a maximum of 50 pips loss. This shifts the averages to my favor.
4: The moderate wins I am keeping more.
60 pips keeps +15 more pips then the previous trailing stop.
70 pips keeps +17
80 pips keeps +20
90 pips keeps +23

What would this have done to the results? I would have gained +273 pips for +$30.03 more then a 50% gain in profit.
However, and this is important, I would have been stopped out a little bit earlier in some of these trades. That is one of the dangers of back testing that you fit the data to make it work your best case scenarios.

Only actual testing will tell.

Disclaimer: The investments and trades in my videos and blog entries are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.


  1. I'm looking forward to seeing your results. I definitely need to do some more studying on this stuff!

  2. I need to work out a format to respond to this, I have some things to ask a maybe a thing or two to add.

  3. I can't think of a good way to respond, so I'll just say it. Potentially the problem with this is the risk/reward ratio. During a drawdown, you will only be at a 1:2 ratio. I think the trailing stop is fine, but for a better theoretical business practice, you need to stretch out that target a little further to compensate for those 50 pips of volatility at the low end. As it stands you could potentially have several drawdowns followed by the abbreviated trailing stops, and you would not be making money for a longer time, compared to a more favorable solid risk to reward practice.

    1. Are you saying that the profit stop of only x2 the stop is going to not be enough? That is certainly a possibility as I could get 16 losses out of 19 trades as it can work both ways (or worse).

      Atomichockey had a good idea, I might remove the profit stop entirely and just let the trailing stop ride for how long it will go. Its original intent was to counteract my giving up profit of the trailing stop. With it being dynamic I may not need it yet can let the winners ride.

      I'll have both of them going at the same time to do side by side comparisons.