Soft Stops – Two Examples USDCAD

My mentor, Pete Steidlmayer, did not believe in price stops, i.e. stop orders placed with your broker. He taught that traders should exit a trade when the reasons for the trade were no longer valid.

When I first tried applying this concept, I found that I would continually find reasons to remain in losing trades. So, with experience, I found that my best solution was to have two types of stops:

• A hard stop (price stop) and
• A soft stop (Peter’s idea)

The problem with soft stops is this: they apply only to discretionary rule-based methods; and, most such methods provide too many options. As a result, it takes years of experience to accumulate effective soft stops.

The advantage of the 4-Phase Framework? The four stages present limited scenarios about what can go wrong (thus invalidating the trade).

Here I am going to give you two examples. In the process, you’ll see the difference between “knowing what to do” and “doing what you know”.

The first example I outlined in Plan Your Trade, Trade Your Plan.

The chart below shows one of my preferred setups: the Linear Regression Band Momentum Set up. When an instrument hits my trading zone, I like to see decrease momentum. In this case, Bar 2 shows new highs on decreased momentum. But, Bar 2 was not my entry bar.

the next chart shows why: Bar 2’s price action was above the GFAs 2X1. Under my rules, I need to wait for a close below the 2×1 to look for a trigger bar. The chart shows the entry bar.

The entry bar close below the Value Area High. The stats suggest that we should not see a retracement back to the Primary Sell Zone. The bar before the exit worried me. It retested the breakout high at 1.31467. However, from a bearish perspective, the strong selling extreme provided a reason to stay in. Once the price action started to negate the extreme, I exited the trade.

The trade cost me about 10 pips. My hard stop was at 1.3171, a 40-pip risk. So, the early exit saved me 30 pips.

This trade I did not take for Psyquation.

More tomorrow and the reason why I did not take the trade for Psyquation.

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