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Trading within an Established Trend

Trading within an Established Trend

Frequently the market will already be in a trend when the trading day begins. If this is the case then take your direction from the very last sigВэnal. This signal may have occurred the day before or even several days ago. Remember that

The longer the trend has been in existence, the more likely it is to reverse itself, so be cautious.

See Figure 7-7. Naturally, if the trend reverses itself you will follow the indicated procedures for the given trend.

Exiting Positions, Right or Wrong

Well, I've told you how and when to get in, now how do you get out? The following are some suggested exit methods.

Stop Loss. The procedure here is simple enough. You have two choices. Either set a predetermined dollar risk stop loss, which will vary from market to market, or exit on technical action.

If you enter a long position on a decline to the LBP, then you can exit if there are two consecutive bars outside the MAL, which would, of course, constitute a sell signal. If you enter a long on the UBP, then you can use the same exit procedure, knowing, of course, that it entails more dollar risk since you entered at a higher price. A happy medium is buyВэing at the MBP, the middle of the channel. I prefer to use technical action in the form of a reversing signal to exit my trades as opposed to the use of a dollar risk stop loss for this technique.

If you enter a short position on a rally to the USP, then you can exit if there are two consecutive bars outside the MAH, which would, of course, constitute a buy signal. If you enter a short on the LSP, then you can use the same exit procedure, knowing, of course, that it entails more dollar risk since you entered at a lower price. A happy medium is sellВэing at the MSP, the middle of the channel. I prefer to use technical action in the form of a reversing signal to exit my trades as opposed to the use of a dollar risk stop loss for this technique.

Trailing Stop Loss. Trailing stop losses should be used once a position has started to move strongly in your favor. I have a number of suggestions to offer you in this respect, all based on extensive personal experience.

Вц Trail a stop loss below the lowest low of the last three bars for long positions or above the highest high or the last three bars for short positions. This procedure has already been described. Do not use a trailing stop loss until you show a reasonable profit. This amount varies from market to market and from trader to trader.

Вц Use a stochastic exit signal as your exit once you have a good profit. (See Chapter 5.)

Вц Exit at a specific price target and do so when the market has "bulged" or "cratered" in your favor, particularly if this occurs late in the trading session.

Вц Remember that you will be out of your trades by the end of the day, so if neither of the above methods works for you get out either MOC or shortly before the close.

Вц Consider multiple positions on entry so that you may have the luxury of exiting them using several different techniques. Although this may increase overall initial risk exposure, it will also allow you to capitalВэize on strong trends which are consistent with your position.