Figure 6.11 A 10-period stochastic indicator and an exit

when the stochastic was high and turned down.

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behavior and how to properly use it. For example, when using these indicators for exits, be sure that their time frame is similar to the time frame of your trading.

Try to find trends where the market and indicator coincide or the indicator leads the market slightly. Make sure the indicator moves with the market. When you are in a position, try to lighten up or get out whenever the indicator turns the other way. What we want to do is look for an early warning sign of weakness, the indicator turning.

Figure 6.12 uses a 10-period least squares momentum indicator and an exit when the indicator begins to turn up. Again, we are looking for signs of a market turn to exit our positions.

TIME STOPS

Time stops are very simple and easy to use. They place a time limit on your trade. Experience shows us that whenever you enter a trade, within a few days the market should confirm your analysis by moving in your anticipated direction. If the market fails to move, perhaps your original analysis is wrong. A time stop of three days gives the trade three days to work out. If after three days, you have not been stopped out or

Figure 6.12 a -period least squares momentum indicator and an exit when the indicator begins to turn up.

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a profit is not made, exit the position. Usually you will be taking a small loss when this occurs.

The time windows length depends on the time frame you are trading in. For a short-term trader, 3 to 5 days may be sufficient. For a longer-term trader, perhaps 10 to 20 days is better. For a day-trader, 15 minutes may be a long enough time frame. What you will find is that if the market hasnt moved within your time frame eventually you will be stopped out anyway and at least you can get out with less of a loss or even a small profit.

This technique forces you to analyze a market to determine the appropriate time needed to work out. This can be very frustrating if you give a trade 3 days and on day 4 the market takes off in your anticipated direction. Keep two things in mind: One is that you can always get back into a trade at a later time if you still feel that your initial analysis is correct. Two, preservation of capital is key. If the trade is not working after the time stop you have chosen, your capital may be better used in another trade or market. You should not tie up all your capital on a trade waiting while other better opportunities may be out there.

Be careful during quiet markets and markets that are trapped in a tight range. These markets go nowhere for days and even weeks until eventually the market explodes. If you are in this type of market, you may want to give the trade a little bit

longer than normal to work out. Keep the type of market you are trading in mind when you formulate your time stop. For example, you enter a market and realize that for the past 3 weeks the market has been very quiet trapped within a defined range trading back and forth. If you originally only intended to give the trade 3 days to work out, perhaps 5 or 7 might be better. Conversely if a market has been very volatile, you may want to shorten the time stop. Figure 6.13 uses three days for the trade to work out. Why three days? Only experimentation and testing can give you a fair number of days to use. Keep in mind that this approach takes discipline because it is very difficult to exit a position when you still might have a possibility of the trade working out.

Profit Objective Stops

Profit objective stops are predetermined levels of profit at which you will exit a position. For example, 0.4 ticks may be what you determine to be a reasonable profit per trade with the market you are trading. You will set a market order to get out of a position once 0.4 ticks is reached in your anticipated direction.

FIGURE 6.13 A TIME STOP. THE POSITION TAKEN ON AUGUST 13 TIMED OUT AFTER THREE DAYS OF NO ACTIVITY.

08/14/96

30YR T-BOND

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He uill give this trade 3 dags to move in our direction.

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30YR T-BOND

08/23/96

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We exited after three dags and avoided a loss.

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