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 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.

3 Day-Trading Technical Analysis Indicator for FOREX, CFD and Stocks

There are lots of technical analysis indicators, it is a complex task to go through them one by one. Hence, many of our readers have asked for recommendations of day trading indicators. 

To get you started with day trading, I suggest these three trading indicators.

1. Donchian Channel
2. Moving Average
3. Stochastic Oscillator

They are simple, easy to understand, and useful for day trading. No, they are not perfect. But they form a nice package to start with.

1. DONCHIAN CHANNEL (BLUE)

Richard Donchian, the pioneer of trend following, invented the Donchian Channel. The channel plots the highest high and lowest low of a specified time period. An average of the two values is also calculated and plotted as the mid-line.

Donchian Channel shows you where the market is now, compared to its past, in a direct and visual way.

The Donchian Channel is useful for day trading as you can use it to keep on eye on the larger time frame. Use a 100-period Donchian Channel to keep you with the longer term trend.

2. MOVING AVERAGE (ORANGE/RED)

A x-period moving average is the average of the past x number of  price closes. As new price bars close, the moving average will move along, dropping the oldest close and including the newest close in its calculation.

The direction of the moving average highlights price trend, and the space between price and the moving average highlights momentum. This simple indicator packs a punch if you know how to use it.

While there are dozens of moving average flavors, start with the simple or exponential moving average with a 20-period setting for day trading.

3. STOCHASTIC OSCILLATOR (LOWER PANEL)

The stochastic oscillator is a popular day trading indicator.

Its working logic is like that of Donchian Channel, in the sense that it measures the current market position relative to the market’s past trading range. However, it assumes that the market is in a trading range and turns that measurement into an oscillator that moves between 0 to 100.

It is useful for finding day trade entries as it is sensitive and responsive. (Use %K-5, %D-3, Smooth-3 for your settings.)

For a multiple time-frame day trading method using stochastic, take a look at Kane’s %K Hooks strategy.

DAY TRADING INDICATORS – A WORD OF CAUTION

You get three indicators. Now it’s time for three warnings against them.

1. Indicators are not perfect, understand when and how to use them.
2. Don’t neglect price action when trading with indicators. Consider using price action patterns to improve your analysis. (Like this simple failure pattern, or the Hikkake pattern.)
3. Do not overwhelm yourself with indicators. Consider the value of every single indicator you add to your chart. Does it add value? Remember to trade simply.

Sources:

http://www.tradingsetupsreview.com/3-practical-day-trading-indicators/

http://www.investopedia.com/terms/d/donchianchannels.asp

http://www.investopedia.com/terms/m/movingaverage.asp

http://www.investopedia.com/terms/s/stochasticoscillator.asp