Introduction
A “fractal-based trailing stop EA” is more exciting and useful than it may seem, so let me quickly explain what it is before losing you! An expert advisor or automated trading system created this article and a few others by using fractals to decide where to place and adjust the stop loss.
Furthermore, this EA will not act as a fully automated trading platform. Our stop loss will simply be automatic. This tool may be useful for any trend-following trading strategy you are currently utilizing. Enter your trade as normal, start this EA position, and let it adjust the stop loss for you from there. That is the basic basis for using it.
This may save you time if you find yourself gazing at your computer for hours on end to alter your stop loss when the market swings in your favor.
The bulk of trailing stop approaches just shift your stop away from the current price by a certain number of pip. Both this and its efficacy are inadequate. Not only that, but this small robot can place stops precisely where you want, either slightly above or below the pivots (fractals) in an uptrend or downturn.
The Metatrader platform refers to its automation scripts as “EAs,” but I will not use the term MetaTraders in this article.
The fractal-based stop-loss strategy, which can be utilized with any trading platform that supports automated or manual trading, will be addressed in this article’s general design.
Understanding The Fractal Idea in Trading
A fractal is frequently defined as a pattern with at least five bars (or candles) that surround a high on each side with two lower highs (for a bearish fractal) or a low on each side with two higher lows (for a bullish fractal). A fractal is also known as a pivot level, pivot point, or reversal point.
The following image depicts bullish fractals with green circles and bearish fractals with red circles. In general, bullish fractals suggest turning points where the price moves up or down, whereas bearish fractals indicate turning points where the price moves downward.
The 15-minute chart in the accompanying graph depicts GBP/CHF movement over the course of a day or two. Before it started to increase again, there was a delightful fall lasting around 150 pip.
This graphic will be useful as we design our fractal-based trailing stop method. Segmenting the chart allows us to look at a potential trade-off for the downward trend.
Setting Up the Stop Loss
A frequent entry signal is the breaking of a fractal level when combined with additional triggers. While we will not go into great detail regarding entry points at this time, let us suppose that we initiated a short trade as soon as the price passed above the green horizontal line on this chart, which indicates the first bullish fractal.
Thus, we would enter via the green cross. We’ll place our stop loss for our stop-loss method just above the final bearish fractal before the price breach. The above graphic shows this as a red horizontal line.
Note: As seen in our huge chart above, the entry candle ended up being the highest point on a bearish fractal. We had to go back to the most recent fractal that was validated at the time of entry since we had no idea there would be two lower highs ahead.
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Now that we’re in the trade, we’re attempting to follow the downward trend. What time would be optimal for lowering our stop loss? When the price breaks through, another bullish fractal would be a realistic reaction.
As a consequence, we’ll have to wait for another low to become a fractal, which implies the price must first decrease, then reverse, and then continue to fall into the next fractal low.
As the price breaks through the previous bullish fractal on the previous chart and approaches the green cross, we will lift our stop loss to just above the last bearish fractal that occurred before our price breach. As the price falls, we will continue to use this trailing stop-loss approach.
We’ll incorporate one more rule into our trailing-stop strategy. As you can see, the bearish fractals in the image above are all heading lower and shrinking as they go. This pattern often terminates at the end of a trend. Rather, we have a bearish fractal that exceeds the previous one.
If the price does not break below the last bullish fractal, we will move our stop slightly above the last bearish fractal. Here is an illustration:
Thus, note (4) refers to the final red horizontal line, when we would have been stopped out.
The stop loss is placed just above a resistance level (the bearish fractal) in a downtrend and just below a support level (the bullish fractal) in an upswing, demonstrating the usefulness of using fractals to set stop losses.
It’s a good idea to allow a few pip or two between the fractal point and the stop loss since the price may sometimes burst through it. This may vary depending on the chart’s period. If we’re trading on a 15-minute chart, we may leave six or seven pips between the stop loss and the fractal point.
A 4-hour chart may need a buffer size increase of 16 or 17 pip. The relative volatility of the currency pair also has an impact on it. In contrast to the AUD/USD, the GBP/JPY may cause a false breakthrough at a fractal point due to higher pip values.
It could be a good idea to add this buffer as a “variable” in the design of our automated trailing stop script so that you can change it every time you start it.
In summary,
using a trailing stop-loss approach may significantly enhance trading performance. This concludes our detailed trailing-stop EA explanation.
The trailing stop. EA becomes a useful tool when it employs a fractal-based approach, which enables it to dynamically respond to market swings and protect revenues while reducing risks.
Regardless of your level of experience, the concepts and methods presented here provide a solid foundation for developing profitable trading strategies.
Now that you have this knowledge, you can utilize it to navigate the markets and make decisions that will help you reach your trading objectives.
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