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.

Setting Up Stop Loss Orders

Setting Up Stop Loss Orders

Stop loss order levels should be in fact consistent, else they will cost you money. Self-assertive levels are liable to be initiated by the ordinary cycle. 

Base your stop losses on specialized levels, for example, 

• Support/resistance levels, 
• Above and/or below the latest peak/trough, 
• Above and/or below reversal signals; or 
• At the intersection of moving averages. 

Example

This example represents the use of 2 diverse specialized levels for stop losses: 

The primary stop loss is set just below the level of the latest trough. 

The second stop-loss is put below the support line (on a reversal signal above the support line). 

Backing and Resistance Levels 

Avoid from setting your stop loss precisely at the support or resistance level for two reasons: 

1. Trends regularly switch at these levels and you might be stopped out superfluously; 

2. A large number of stops might be set at the support or resistance level, particularly where it has framed at a round number. 

Rather set your stop loss one or two ticks below a support level or one or two ticks above a resistance level. For instance: If a support level has shaped at $20.00, set the stop loss at $19.90 so that you are only stopped out if the support level is penetrated.

7 Most Commonly Used Technical Analysis Indicators in the Stock Market

Indicators are used as a measure to gain further insight into to the supply and demand of securities within technical analysis. Those indicators (such as volume) confirm price movement, and the probability that the move will continue. The Indicators can also be used as a basis for stock trading, as they can create buy-and-sell signals.

1. On-Balance Volume

The on-balance volume indicator (OBV) is used to measure the positive(+) and negative(-) flow of volume in a security, relative to its price over time. It is a simple measure that keeps a cumulative total of volume by adding or subtracting each period's volume, depending on the price movement. This measure expands on the basic volume measure by combining volume and price movement. The idea behind this indicator is that volume precedes price movement, so if a security is seeing an increasing OBV, it is a signal that volume is increasing on upward price moves. Decreases mean that the security is seeing increasing volume on down days.

2. Accumulation/Distribution Line

One of the most commonly used indicators to determine the money flow of a security is the accumulation/distribution line (A/D line). It is similar to on-balance volume indicator but, instead of only considering the closing price of the security for the period, it also takes into account the trading range for the period. This is thought to give a more accurate picture of money flow than of balance volume. The line trending up is a signal of increasing buying pressure, as the stock is closing above the halfway point of the range. The line is trending downward is a signal of increasing selling pressure in the security.

3. Average Directional Index

The average directional index (ADX) is a trend indicator used to measure the strength and momentum of an existing trend. This indicator's main focus is not on the direction of the trend, but with the momentum. When the ADX is above 40, the trend is considered to have a lot of directional strength - either up or down, depending on the current direction of the trend. Extreme readings to the upside are considered to be quite rare compared to low readings. When the ADX indicator is below 20, the trend is considered to be weak or non-trending.