Volume-based Stop-loss: Alternative SL approach
With the Alternative SL approach, you don't quit your position when it hits the SL level but you
exit it only when a candle CLOSES past your “normal SL“. The reason for that is that sometimes
the price overshoots your level even though the original idea behind the level was right. This could
be caused by strong volatility, SL hunt (SL squeeze), or because you simply didn’t give enough
room for the position to develop. I bet it happened to you many times, that you took a SL and few
moments after that the price completely changed direction and your trade would end up in a
profit. Alternative SL approach takes care of situations like that.
However, there is also a downside to this. The downside is that you don’t know in advance what
your final SL is going to be.
It is not easy to manage such positions from the money management point of view. For this
reason, I use "catastrophic scenario SL" which is 150 % of the "normal SL". If the price hits
“catastrophic scenario SL” – I quit the position immediately. With this, you can at least tell how
much the absolute worst scenario will cost you.
In my experience, the Catastrophic SL doesn't get hit too often. It is there mostly as a safety pin.
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Let me demonstrate how the Alternative SL approach works on a trade that I closed yesterday.
Below, you can see a Daily chart of AUD/NZD. I had there a long swing level which was based on
Volume accumulation setup. The "normal SL" would be around 1.0659 - exactly at the low of the
pin bar wick you can see on the left side of the chart. This is a good and a logical place for a SL
because it is below the main support zone = below the volume cluster (in the blue circle) and in a
low volume area. After I entered the long trade, the price went against me and it hit the "normal
SL". I think that probably lot of people had their SL orders there and the market just went there
to take them. After that, the price finally turned upwards.
I didn't close my position when the price hit the "normal SL" because I used the Alternative SL
approach. I would have closed my position only in two cases - 1. If a Daily candle closed below the
"normal SL" line or 2. If the price hit the Catastrophic SL. Neither of these two scenarios happened
so I held the position and I was able to take a full profit the next day.
Let me give you one more example, this time of a swing trade on the EUR/USD. The price didn’t
really respect a short level that I had there and went into the SL. However, the Daily candle didn’t
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close above the SL and it also didn’t hit the catastrophic 150 % SL. For that reason, I didn’t quit
the trade and held it. Eventually, the price turned and I was able to take a profit.
*I prefer to use the Alternative SL approach in my swing trading and I use it with daily candles. I
don’t apply the Alternative SL method to my intraday trades.
Stop-loss management
Stop-loss management is when you manage your potential losses by moving the SL order. I
distinguish three SL management approaches:
• Aggressive approach: You trade without moving your initial SL. If you used for example 12
pips SL then don’t move it no matter what happens. There are only two outcomes of the
trade: full SL or full PT.
Even though this approach may seem too simple to work, it is in fact, pretty effective.
However, sometimes there are cases when the position turns just a tiny bit before the
Profit Target and then runs into a full SL. Unfortunately, this approach doesn't deal with
such cases.
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