figure 6.7 comparing the performance of a simple and time-series moving average. when looking for a moving average for a stop, notice how the time-series average adapts to changes in the market quicker than a simple moving average.

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36 08 15 22 tl 06 13 20 28 J 10 17 24 J 08 15 22 23 ft

In Figure 6.8, we shorted on July 7. Once the initial stop is set, we do nothing until the market closes 10 or more points from our entry. As the market moves, we lower at levels 2 (breakeven), 3, and 4. At level 5, we get stopped out.

Trailing Highs and Lows

The technique of trailing highs and lows ensures that if the market rallies in your direction you will be able to partake in some if not all of the move. The basic premise is that if your initial analysis is correct, then the market should not take out the previous lows/highs or previous several days of lows or highs.

Once you are in a position, you place your stop at the high/low for the previous day or days and move your stop each day to the next days high/low until eventually you are stopped out. A short-term trader who entered long might use the previous days low as a stop. Each day, the trader would change the stop to reflect the level of the previous days low. For example, in Figure 6.9, stops were at the previous days high

Figure 6.8 An incremental approach. Stops are incrementally lowered to levels 2, 3, 4, and 5. we decide to sell on the close when the uptrend line is broken. Initial stops are placed at the previous days high. Every time the

market closes 10 points from our entry price, we lower stops 5 points until we are stopped out. position was exited as price crossed back over level 5.

sap 500

08/02/36

675 670 665 660 655 650 645 640 635 630 625 620 615 610

36 10

22 29 ft

when short and the previous days lows when long. Hold until you get stopped out. Make sure initially that the previous days high/low is not to far away. We do not want to incur any more risk than is necessary.

Another variation is to add/subtract an increment to the high/low that you use to reduce the chance that a false move would stop you out of your position. Perhaps in a long position you can use the previous days low minus 0.1 ticks. Look at the market you are trading and determine what levels work best. Perhaps a two-day low works better than the previous days low. You may decide that the low of the last three bars is better. Experimentation is recommended. Longer-term traders can use weekly or monthly highs/lows for their stops.

In Figure 6.10, experiment to find the best number of ticks to add to the high/low. On June 10, we go long. On June 11, the market takes out the previous two days of lows by several ticks and then continues to rally. We could have avoided getting stopped out by adjusting it downward by a predetermined amount.

Figure 6.8 An incremental approach. Stops are incrementally lowered to levels 2, 3, 4, and 5. we decide to sell on the close when the uptrend line is broken. Initial stops are placed at the previous days high, every time the

market closes 10 points from our entry price, we lower stops 5 points until we are stopped out. position was exited as price crossed back over level 5.

SSP 500

08/02/36

680

685 680 675 670 665 660 655 650 645 640 635 630 625 620 615 610

36 10

23 ft

when short and the previous days lows when long. Hold until you get stopped out. Make sure initially that the previous days high/low is not to far away. We do not want to incur any more risk than is necessary.

Another variation is to add/subtract an increment to the high/low that you use to reduce the chance that a false move would stop you out of your position. Perhaps in a long position you can use the previous days low minus 0.1 ticks. Look at the market you are trading and determine what levels work best. Perhaps a two-day low works better than the previous days low. You may decide that the low of the last three bars is better. Experimentation is recommended. Longer-term traders can use weekly or monthly highs/lows for their stops.

In Figure 6.10, experiment to find the best number of ticks to add to the high/low. On June 10, we go long. On June 11, the market takes out the previous two days of lows by several ticks and then continues to rally. We could have avoided getting stopped out by adjusting it downward by a predetermined amount.