Estimating Stop-Loss and Take-Profit Levels from Price Excursions
Summary
The article estimates stop-loss and take-profit levels from historical price excursions over a chosen holding horizon. It measures upward and downward deviations separately, converts their frequencies into cumulative probabilities of reaching or exceeding candidate levels, and searches for levels under several criteria. These include balancing level size against its trigger probability and maximizing expected payoff, with buy and sell positions treated separately. It also considers assigning different execution horizons to profit targets and loss limits.
Examples use EURUSD hourly data and compare selected levels in a simple randomized-entry test; reported outcomes vary across the tested alternatives. The article also gives examples based on expected value and discusses evaluating profit relative to time. These are historical, sample-specific illustrations, not proof of a generally profitable method. The assumed holding period, instrument, data, and exit setup shape the estimates, and the testing setup does not establish performance for a signal-driven strategy or future market conditions.
Key ideas
- Historical maximum favorable and adverse price excursions can estimate the chance of reaching candidate exit levels.
- Upward and downward excursion distributions may differ, so buy and sell exit levels can be estimated separately.
- Candidate stop and target levels can be selected using trigger probabilities or expected payoff.
- The holding horizon changes excursion estimates and can be set differently for stops and targets.
- The article's EURUSD tests are illustrative and do not establish general or forward profitability.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.