Monday, June 23, 2014

Tighten Your Stops

Often, this term is used to advise traders: The markets are volatile OR The market may reverse OR The market is looking overbought, So, 'Tighten Your Stop'.
How should the trader implement this advice to 'Tighten the stop' ?

        The objective of 'Tighten your Stop' is to reduce the risk and/or lock-in profits. As we hold a position over time and the paper profits begin to build, we periodically adjust the Stops to lock a larger percentage of our gains as time passes by. By tightening the Stops, we reduce the risk of incurring losses - reduce the risk of allowing profits to slip away.
Process:
    
        If you have a Buy (long) position, then:

1. Identify the nearest support level. This can be a Pivot Low, or a consolidation. Put your stop just below the support.
2. Calculate the 8 or 13 period moving average. Your stop should be moved just below the average. If you really want to tighten, then use a 5 period average.
3. Locate a Fibonacci retracement of the nearest up swing. Keep a stop at 50% retracement of this up move. If the 50% is far away, then use the 38% retracement, or even 23% if neccessary.
   
       If you have a Sell (short) position, then:

1. Identify the nearest resistance level. This can be a Pivot High, or a consolidation. Put your stop just above the resistance.
2. Calculate the 8 or 13 period moving average. Your stop should be moved just above the average. If you really want to tighten, then use a 5 period average.
3. Locate a Fibonacci retracement of the nearest down swing. Keep a stop at 50% retracement of this down move. If the 50% is far away, then use the 38% retracement, or even 23% if neccessary.

Discipline
       Once a stop is installed, it cannot be moved lower for a buy and higher for a sell. Stops for buy positions can only be moved higher, while stops for short positions can only be moved lower.

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