One more important note:
How many bars should we use to define the trend? We have used 200 bars in
the examples above. It is a compromise – not too much, not too little. If you
were to use only 20 bars, you would risk entering the short-term explosive
market movements which are not real trends as we have explained above. If
you were to use 500 bars, you would hardly find any currency chart with trend
drawdown below 20%. Before we show you how to systematically pick the best
trending pairs and time frames every day, let's look at how to use the trend
drawdown in the most important aspect of trading – using a Stop Loss!
Protecting against volatility
Look at the chart above. The trader who placed the Stop Loss right after
entering the market deserves great applause but the problem is, the Stop Loss
is too tight! Give the market enough space to breath or the Stop Loss will be hit
very quickly.
Some traders use a fixed number of pips, something like 50 pips or 100 pips...
this is bad! Stop Loss has to reflect the current market volatility. Ask yourself:
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