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Tuesday, August 30, 2016

Adjusting your Stop Loss Orders using Moving Average

Adjusting your Stop Loss Orders using Moving Average

Adjust your stop loss orders, after some time, toward the pattern being traded: 

- In an up-trend move your stop loss up to underneath or below the Low of the latest trough. 

- In a down-trend move your stop loss down to over or above the High of the last top/peak. 

Just a break in the pattern/trend (or large correction) will stop you out. 

Utilizing Moving Averages 


An alternative  approach, that may keep you from being shaken out of a pattern too soon, is to utilize a long-term moving average in conjunction with the above. Stan Weinstein (Secrets for Profiting in Bull and Bear Markets) proposes utilizing a 30-week moving average. This is reasonable for speculators following the primary trend, adjust the length of the moving average if trading in a shorter time allotment. 

In an up-trend, move your stop loss to below: 

- the Low of the latest trough, or 

- the moving average, whichever is lower. 

In a down-trend, move your stop loss to above: 

- the High of the latest top, or 

- the moving average, whichever is higher. 

Example:

Johnson and Johnson is graphed with a blue 63-day exponential moving average. Stop loss order levels are delineated by yellow horizontal trendlines. 

Adjusting Stop Loss Orders
Adjusting your Stop-Loss Order


1. Go long [L]. The sign is taken when price regards the moving average. A stop loss order is put at [S1], below the Low of the latest trough or below the moving average, whichever is lower (appeared by the begin of the trend line). 

2. At [S2] move the stop loss up to beneath the moving average at the following trough. 

3. At [S3] move the stop loss to beneath the Low at the following trough (this is lower than the moving average). 

4. At [S4] move the stop loss to beneath the moving average at the following trough. 

5. The stop loss order is actuated [X] when the following correction falls underneath the previous trough. 

Ranging Market 

In a ranging market, adjust your stop loss in view of the cycle in one-time frame shorter than the cycle being exchanged. For example, if trading an intermediate (in a ranging market), move your stop loss orders up or down as per the short cycle.