【Twice-Month Development Story Episode 1】Why I created a reverse-strategy EA with stop loss
There is a common trait among the EAs I have built so far. Each one has been“No stop-loss” typeWhile carrying unrealized losses, waiting for the market to recover — the so-called recovery grid. The new EA I’m introducing now, “Shogetsu” (So-getsu), is the exact opposite. If the read goes wrong, I cut the loss early to trim the tail. Why did I create a mean-reversion EA with a stop-loss? Episode 1 starts from its starting point.
Shōkinryū and Enmusubi AI share the same underlying idea. Do not lock in losses; add to positions via averaging down, offset losing positions with winning ones, and recover. If the market moves back and forth, this type works very well. In long backtests, it reliably produced profits.
However, this type has one clear weakness: “not having a stop-loss” itself.
Carrying drawdown and waiting for a recovery means that, conversely, if the market moves in one direction for too long, unrealized losses can balloon indefinitely. A design that performs well in a gentle range may bite hard in a fast one-way market. The same mechanism can appear drastically different depending on the market quality.
I have felt this fear not as a theoretical concept but in actual trading operations. That is why I speak out loudly.EAs without stop-loss are weakest in sudden changes, and the figure below shows the difference in the “tail” of losses.
※ Image illustration. It compares how unrealized losses expand when prices move contrary to expectations with and without stop-loss.
Shogetsu is an EA born from this lesson. If a trade goes wrong, it is closed quickly with a stop-loss linked to ATR (market movement magnitude). I set the potential impact of a single trade in advance — in other words,a design that cuts the tail of losses.
Unlike a recovery grid, unrealized losses do not balloon endlessly. Instead, if stop-loss continues, capital is gradually eroded. Every model has pros and cons. Shogetsu’s weakness is “weak when stop-loss events accumulate.” Its strength is “loss on a single hit is limited.” I chose this trade-off deliberately.
Shogetsu is a mean-reversion EA. When the market is oversold, it buys; when overbought, it sells. It aims to capture the recoil from extreme price moves.
Mean-reversion has well-known weaknesses. Its win rate tends to be high, buta single mis-hit can be large. When a trend is strongly ongoing, mean-reversion is ruthlessly crushed.
The most effective remedy for this weakness is none other than stop-loss. That’s why I paired mean-reversion with stop-loss. To capture the recoil, and exit early with SL if wrong. I’ve combined offense and defense into a single EA.
Shogetsu means two moons. This EA holds one buy position and one sell position independently. Two moons in the same sky — that’s the origin of the name.
To hold both buy and sell simultaneously, Shogetsu is designed to be used with a hedging account. Why hold buy and sell separately? I’ll discuss that purpose in a future installment.
Shogetsu is still a pre-sale EA. In this series, I will show the journey to completion, including both good points and risks, in order. Planned topics include:
- Why it is dedicated to EURUSD
- Why hold buy and sell separately
- How to measure “excess”
- Why all distances (take profit, stop-loss, trailing) are determined by ATR
- What was seen in about 7.5 years of backtesting (Profit Factor, Recovery Factor, Maximum Drawdown)
- And honestly, Shogetsu’s weaknesses
Shogetsu is an EA with a stop-loss, but it is not a magic that eliminates losses. Mean-reversion is weak in strong trends or sharp moves, and capital decreases if stop-loss compounds. It is not a holy grail, which I want to state at the outset.
Nevertheless, the design of pre-emptively cutting the tail of losses provides a sense of security different from a recovery grid. Next time, we will delve into the very idea of mean-reversion that says “excess moves back.” I’d be glad if you’d continue reading until the end.
※ This article is intended to provide information and not investment solicitation. The performance results shown are past results and do not guarantee future profits. FX/CFD trading involves risk. Please make investment decisions at your own responsibility.