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29

Some judgment is involved with this method, so study it carefully. The market should move in your direction by a certain amount before you place this stop. You want to make sure that by placing this stop you will not be taken out prematurely. Sometimes this may occur, but the benefits far outweigh any potential trades that are stopped out prematurely. If you went long the Swiss franc at .7640 and the market moves to .7650, placing a breakeven would hurt your chances of success because in the course of the markets fluctuation .10 ticks can easily be hit. Therefore, use an amount that gives you some room. If the Swiss franc trades to .7700, now would be an ideal time to place the breakeven. If the market has moved .60 ticks in your direction, chances are it will continue; however, if it reverses your risk is zero and you can wait for the next trade.

Remember that you can always get back into a trade if you are stopped out at breakeven and you still feel the market will move in your direction.

In Figure 6.3, we bought on the close of July 8, 1996, at .6579. Our initial stop had us risking $500 or .40 ticks; this is placed at .6539. On July 15, the market closed above .6620, thus allowing us to raise our stops to breakeven. No matter what happens from here on out, we will only lose commissions.

Figure 6.3 raising the stop to breakeven level.

DEUTSCHE fIRK

08/12/96

..........................."..................:

\............................................................

-Market closes t.40 tides from The entry price so stops-are raised to-breakeven:

1.1-

- (2) fsiaps raised to break-even

T"

T.... buy. on.. the. close. 6., 6579..... "Initial swat. ,6539 t-

68.4 68.2 68.0 67.8 67.6 67.4 67.2 67.0 66.8 66.6 66.4 66.2 66.0 65.8 65.6



Trendlines

When you first enter a position, you place your initial stop. As the market moves in your direction, you place your breakeven stop. Now you can look at the various ways to adjust your stops. The trendline technique is one of those ways.

Trendlines are lines drawn connecting a series of lows or highs in a market. An uptrend line connects higher lows. A downtrend line connects lower highs. Generally to form a trendline, you need to connect three or more points. The more points you connect, the stronger (more reliable) that trendline is. A trendline that connects two points is not as reliable as one that connects four or five.

Draw a trendline and place your stops just below the value of the trendline; every day as the value changes, adjust your stop accordingly. Remember that the trendline does not change; only the value of the line changes as each day goes by. As the market moves in your direction, this trendline stop will increase in value until eventually you are stopped out. This will ensure that as the market moves, you will partake in the movement as well.

Trendlines are more of an art than a science so make sure that you are comfortable with trendlines and know how to draw them correctly. If at the time of entry, no

Figure 6.4a a downtrend line placed on lower highs, stops are constantly adjusted at the value of the downtrend line, until the line is broken.

DEUTSCHE IH1

05/22/96

Initial stop level

Short..from ,6738..

Exit at break of trend

.......................................................A

it Yf*t<

68.5 68.0 67.5 67.0 «.5 66.0 65.5 65.0

96 18 25

15 22 29 06 13 20



clear trendline is evident, then wait until the market moves so you can draw the trend-line and place stops accordingly. Then, as the market trends in your direction, you are following the market as well.

Once we place our initial stop, we may need to keep this stop in place until a clear trendline emerges if one has not been established. In Figure 6.4a, the market rallies (possible stop running) on August 18, then continues to sell off. We will use this high to connect our downtrend line. From this point forward, we will adjust our stops to the level of the trend line. If the market continues to move in your direction with a greater velocity, it might be necessary to draw a second trendline at a steeper angle to keep up with the market and to avoid excessive giveback. This will enable you to lock in a greater profit. Take a look at Figure 6.4b.

Figure 6.4b a faster trendline was created to keep up with faster price action. By drawing a secondary trendline the position was exited at 1 1.50

instead of 1 13 where the original trendline fell.

30yr t-bono

12/10/96



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