I've noticed there are some people on here that are quite mathematically inclined and I was hoping someone could help clarify a question I have regarding trailing stoploss' efficiency relative to an open Risk/Reward ratio.
Anyone who has ever read the most basic of trading guides at one point or another has probably stumbled across the concept of a trailing stop, and normally it involves some sort of % or fixed amount that price is trailed. The trailing amount suggested is generally loosely based on how much risk you supposedly would expose your trade to relative to the reward you are looking to capture.
...Here is where my question comes in an it's regarding the "loosely based" part of the equation. When discussed in terms of small dollar values or low R:R ratios " loosely based " will probably fall within the margin of error, but with risk: high reward ratios small changes can cause increasingly more violent flucuations in the Open Risk:Reward ratio.
This being the case from a purely ideal perspective it would be the most advantageous to get out of the trade at the absolute peak to avoid the inefficiency of being drug through any type of drawdown and possibly reenter after the pullback. Clearly picking tops and bottoms likely isn't going to be a recipe for success to rely on. As such is there are way to calculate the efficiency of exiting a trade after a certain amount and either taking the other side or waiting for the next trade?
1:200 Risk/Reward Ratio
-10% retrace/loss (20R) or 20x original risk
-20% retrace/loss (40R) or 40x original risk
..etc
At a certain point factoring in slippage & commissions there has to be a point where it was more efficient to exit and reenter if you so chose because your rate of loss is asymmetrical to corresponding gain required to recover and the issue becomes exponentially more severe as the trade retreats from its peak.
Anyone who has ever read the most basic of trading guides at one point or another has probably stumbled across the concept of a trailing stop, and normally it involves some sort of % or fixed amount that price is trailed. The trailing amount suggested is generally loosely based on how much risk you supposedly would expose your trade to relative to the reward you are looking to capture.
...Here is where my question comes in an it's regarding the "loosely based" part of the equation. When discussed in terms of small dollar values or low R:R ratios " loosely based " will probably fall within the margin of error, but with risk: high reward ratios small changes can cause increasingly more violent flucuations in the Open Risk:Reward ratio.
This being the case from a purely ideal perspective it would be the most advantageous to get out of the trade at the absolute peak to avoid the inefficiency of being drug through any type of drawdown and possibly reenter after the pullback. Clearly picking tops and bottoms likely isn't going to be a recipe for success to rely on. As such is there are way to calculate the efficiency of exiting a trade after a certain amount and either taking the other side or waiting for the next trade?
1:200 Risk/Reward Ratio
-10% retrace/loss (20R) or 20x original risk
-20% retrace/loss (40R) or 40x original risk
..etc
At a certain point factoring in slippage & commissions there has to be a point where it was more efficient to exit and reenter if you so chose because your rate of loss is asymmetrical to corresponding gain required to recover and the issue becomes exponentially more severe as the trade retreats from its peak.