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.
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.
Johnson & Johnson is charted with a 63 day exponential moving average. Stop loss order levels are depicted by horizontal trendlines.
- 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).
- At [S2] move the stop loss up to below the moving average at the next trough.
- At [S3] move the stop loss to below the Low at the next trough (this is lower than the moving average).
- At [S4] move the stop loss to below the moving average at the next trough.
- The stop loss order is activated [X] when the next correction falls below the previous trough.
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.