 STEP
3 - FOLLOW THE MARKET WITH TRAILING STOPS TO LOCK IN A PROFIT |
| Trailing
stops take much of the judgment and stress out of trading the market. Rather
than evaluate your position as each price bar forms, you can simply follow
the market with a mechanical trailing stop. But trailing stops are a two-edged
sword. If too tight, they can stop you out early in the trade, leaving a
lot of money on the table; if too wide, you can give back big profits before
being stopped out. |
| Chart
9 - Using Trailing Stops that closely follow the market, yet give elbow
room to move, takes much of the judgment and stress out of trading. The
protective stop for each price bar is automatically calculated on the close
of the previous bar. |
| Chart
9 illustrates the use of the daily Short-Term
(ST) and Long-Term
(LT) Trailing Stops. |
|
|
| The
red ST Trailing Stop from the highs at 4 and 5 is designed
to closely follow prices down and stop out following a trading cycle bottom
(or closely follow prices up to a top in a rising market). |
| The
green LT Trailing Stop is designed to give prices more leeway to keep us
in the market for a more sizeable move, often carrying into a second trading
cycle or weekly cycle bottom. |
| Using
two trailing stops also highlights the advantage of trading in multiple
contracts. All too often with one contract it is an either/or situation
that puts us in an uncomfortable bind wanting to lock in a profit but worried
that money will be left on the table. |
| With
two contracts we can have our cake and eat it too, as the Short-term Stop
takes us out of the market near cycle bottoms, and the Long-term Stop provides
a mental reassurance that if the market does continue down in a larger more
sizeable move, we will be there to participate in the larger profits. |
|
|
