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Trading > Stop Loss Orders > Adjusting Stop Loss Orders

Adjusting Stop Loss Orders

Adjust your stop loss orders, over time, in the direction of the trend being traded:

  • In an up-trend move your stop loss up to below the Low of the most recent trough.
  • In a down-trend move your stop loss down to above the High of the last peak.

Only a break in the trend (or large correction) will stop you out.

Using Moving Averages

An alternative approach, that may prevent you from being shaken out of a trend too early, is to use a long-term moving average in conjunction with the above. Stan Weinstein (Secrets for Profiting in Bull and Bear Markets) suggests using a 30 week moving average. This is suitable for investors following the primary trend, adjust the length of the moving average if trading in a shorter time frame.

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

  • the Low of the most recent trough, or
  • the moving average, whichever is lower.

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

  • the High of the most recent peak, or
  • the moving average, whichever is higher.
Example

Johnson & Johnson is charted with a blue 63 day exponential moving average. Stop loss order levels are depicted by yellow horizontal trendlines.

Johnson & Johnson: stop loss with moving average

  1. Go long [L]. The signal is taken when price respects the moving average. A stop loss order is placed at [S1], below the Low of the most recent trough or below the moving average, whichever is lower (shown by the start of the trend line).
  2. At [S2] move the stop loss up to below the moving average at the next trough.
  3. At [S3] move the stop loss to below the Low at the next trough (this is lower than the moving average).
  4. At [S4] move the stop loss to below the moving average at the next trough.
  5. The stop loss order is activated [X] when the next correction falls below the previous trough.

Ranging Market

In a ranging market adjust your stop loss based on the cycle in one time frame shorter than the cycle being traded. For instance, if trading an intermediate cycle (in a ranging market), move your stop loss orders up or down in accordance with the short cycle.



 
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