But then another member of the Trading Rush Discord Server noticed that the price doesn’t go near the stop-loss in a good winning trade, and only goes towards the stop-loss when the entry is bad and they are about to lose. So can’t we just move the stop-loss closer? If so, will the win rate increase or decrease since the profit target will also come closer? To answer this question, I took another 100 trades and the results were pretty amazing as you will see.
A few months ago, I was in a short trade with a stop-loss above the pullback and a resistance area. The trade was taken near a resistance, the price had reversed from the resistance before indicating a selling pressure near the resistance area, and the stop-loss was above the reversal point. On paper, the trade had a very high probability of winning. But that’s not what happened. The price moved towards my stop-loss and the market closed. Now there is a big problem. If the price opens with a gap up, I will lose more than what I expected. Unfortunately, that’s what happened and I lost money, but at the same time, I didn’t. You see, the whole point of using a pullback stop-loss is to decrease the probability of stop-loss getting hit. If the direction of price movement was reversed from a point before, it can happen again, and we can set the stop-loss after that reversal point.
After the market opened with a gap up, it triggered my stop-loss, but then immediately started to move towards the entry direction. It was reversing from the pullback reversal point. So I reentered pretty much instantly after I saw the selling pressure with a stop-loss above the pullback again, and this time the price moved in the entry direction and the profit target was hit. The loss was recovered and it was like the loss never happened. Breaking the strategy rules is not a good idea, but blindly sticking to entry and exit rules is also not a good idea. You should have a strong market view and adjust your trading style with the market. When I took the trade, my market view was short because the price was at resistance. When the stop-loss was hit and the price started to reverse near the resistance, it simply confirmed the original market view, and the stop-loss only got triggered because of the gap open. If the price had made an upward move after the gap open, I wouldn’t have reentered because now there is no selling pressure near the resistance, and it would have been risking more on a losing trade. That is not something we want to do. Setting stop-loss after a reversal point is always a better idea on paper. But what if you don’t?
I took 100 trades with a stop-loss below the reversal point. I was asked to set it at 50% of pullback stop-loss distance on Discord, so that’s where we will set them approximately. Since we recently tested the MACD strategy 100 times on Bitcoin, I ran the following tests on that same market structure. The win rate with the pullback stop-loss was 62 percent with a 1.5 to 1 reward risk ratio and the profit graph looked like this. Let’s see if the 50 percent smaller stop-loss will increase or decrease the win rate.
As of writing this, Bitcoin has made an upward move of around 200 percent in the last 12 months and made a high of more than 250 percent. If you would have simply used the buy and hold strategy, you would have tripled your initial capital. But most of this upward move was not a straight line. There was choppiness, noise, sudden moves, and then some straight moves. If there are a lot of market participants, there will be market noise. So in theory, if you set a smaller stop-loss, the probability of market noise triggering your smaller stop-loss will be higher.
First 10 trades on the same market structure, the pullback stop-loss performed better and got a 10% higher win rate, but 10 trades are not enough. After 20 trades, pullback stop-loss was at a 65% win rate and the smaller stop-loss was at 50%. After 30 trades, there was a 14 percent difference between the two. At 40 trades, the pullback stop-loss had made 2250 dollars with an account size of 10000, whereas the 50% smaller stop-loss only made 1000 dollars. At 50 trades there was a clear difference between the profit graphs of the pullback and smaller stop-loss. The profit graph of the pullback stop-loss was looking much better. The question “If the smaller stop-loss is better?” was asked in the first place was because they noticed the price doesn’t move very close to the pullback stop-loss in a winning trade. And while testing, I saw similar patterns too. In fact, many trades that were lost with a pullback stop-loss were won with a smaller stop-loss because the profit target was now closer. At one point while testing, I thought the smaller stop-loss was performing as good as the pullback stop-loss, but when I saw the win rate in the Trading Rush App, that’s not what was going on.
In some winning trades, the price did make a good move in the entry direction without moving towards the stop-loss, but then there were also trades where the price slowed down after the entry signal. The price still stayed above the pullback stop-loss, but the smaller stop-loss was triggered easily. In these scenarios, the pullback stop-loss made money and after 100 trades, the pullback stop-loss got a 13% higher win rate than the smaller stop-loss.
But what if we use the highest win rate strategy to exit trades as well? MACD is a momentum indicator and shows the increasing and decreasing momentum. In the highest win rate trading strategy, we use this in the trend to open a trade when the momentum of the pullback slows down and the price begins to move in the opposite direction. Since it does this job with 60% accuracy in a trend, the idea is to see what happens if we use the momentum shift to exit trades as well. After taking a long position at the long MACD crossover, you keep the initial stop-loss below the pullback and exit when the next crossover happens. This way, we can stay in a trend for the long run and book some big profits.
In this experiment, I want you to look at the profit graph and win rate, and then compare it with the previous results. You will see something very interesting. One might think, if we are booking smaller profits most of the time, the win rate should be higher because the reward risk ratio is low. But that’s not what happens next.
The first 10 trades, the pullback stop-loss, smaller stop-loss, and the MACD as the exit got 70 60, and 50 percent win rates respectively. But after 20 trades something very interesting happened, the win rate of MACD as the exit was the same as the win rate of the smaller stop-loss, and 15 percent lower than the win rate of the pullback stop-loss, but it actually made the highest amount of profit. After 30 trades, even though the win rate was bad and lowest out of the three, the MACD as the exit was still making more money than the 60% win rate strategy. After 40 trades the win rate was 45 percent but the profit was the highest out of all. After 50 trades the win rate of pullback stop-loss was 56% and the win rate of MACD as the exit was 42, and still, both of them were up by almost the same amount.
In theory, we should book more profits, and we did. That was one of the main reasons the MACD as the exit was able to keep up with the high win rate strategy when it comes to profit gain. As for the win rate, it was actually dropping because sometimes the price would directly touch the initial pullback stop-loss without giving a crossover, and sometimes would slow down after the entry resulting in crossover and then a small loss or a small profit. In the long run, most trades ended in a loss. After 100 trades, the pullback stop-loss with 62 percent win rate had made 5500 dollars, the smaller stop-loss with 49 percent win rate made 2250 dollars, and the MACD as Exit with 42 percent win rate, lowest out of the three, made 3275 dollars. The lowest win rate stop-loss strategy made more money than the smaller stop-loss strategy.
Even though the pullback stop-loss made more money and got the highest win rate, blindly sticking to it all the time is a bad idea.
This is a live chart, the price on this chart made a move in the upward direction, then made a move in a downward direction. The pullback found support and reversed from this area. This area is clearly visible. Even though we don’t know why the price went in the opposite direction from this area, we have the data that says if the price reversed from this area, it has a good probability of reversing again. And as you can see, after moving in the sideways direction, the price made a move down and reversed from the pullback again. So if someone had entered a long position for whatever reason but had their stop-loss set below the pullback, the trade would be still running. On the other hand, if they had set a smaller stop-loss, the stop-loss would have easily triggered by now.
But let’s say there was moving average support or strong support nearby. Then setting the stop-loss below the pullback is actually a bad idea, because then, the price can cross the pullback stop-loss, find support at the next support area, and then move back in the entry direction. In this scenario, setting the stop-loss below all nearby support areas is a better idea and will increase your probability of winning.
On this chart, the price is near the 200 moving average support, and there is one of the high probability candlestick patterns from the Trading Rush Free Price Action Course. If you take a long position here, the best place to set the stop-loss is below the 200 period moving average support, as well as below the pullback since they are very close to each other. Unlike the first scenario where we didn’t know why the price was reversing, in this scenario, we know the price is reversing from the 200 period moving average support. This kind of trades, where the reason for the reversal is clearly visible has a higher probability of winning.
So which one should you use? The pullback stop-loss was better at win rate, had the highest number of winning streak, the profit graph looked better out of all three, and it made the highest amount of profit. So use the pullback stop-loss most of the time and adjust to the market when there are other reversal points nearby!
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