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Training Video_31

 

TR&NDS Trailing STOP

In this part we will look at the application of risk management, continuing with the use of trailing stops and here looking at my proprietary trailing stop called TR&NDS, that stands for Trailing Resistance &nd Support.

A trailing stop should be used as a last warning signal to close a trade when other technical or human signals fail, that way preventing losing profit. The very last warning is of course the initial stop.

The different trailing stops we talked about until now allow sufficient price reaction that makes them most effective for medium term trend trading. If we want a short term trailing stop it will have to take into account much more the short time price action. So, for the creation of TR&NDS we will look directly at the price movement.

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Hallo, Sylvain Vervoort with technical analysis part 31. In this part we will look at the application of risk management, continuing with the use of trailing stops and here looking at my proprietary trailing stop called TR&NDS, that stands for Trailing Resistance &nd Support. Remember, the best technical analysis will not be successful without good money and risk management. Pay a visit to my website at stocata dot org and buy my new book “Capturing Profit with Technical Analysis”, a complete technical analysis reference and a winning trading system.

The different trailing stops we talked about until now allow sufficient price reaction that makes them most effective for medium term trend trading. Using lower percentages or a smaller multiplication factor for the ATR trailing stop will mostly result in too many losing trades. If we want a short term trailing stop it will have to take into account much more the short time price action. So, for the creation of TR&NDS we will look directly at the price movement. The most reliable reference is price support and resistance and the main item here is price turning points. In an up move, we define a pivot support point when there is a low price with the 2 bars before and after this low having equal or higher lows.

In the video about windows or gaps, we learned that up gaps or windows in an uptrend are giving support. So we will add code to detect up gaps and make use of this gap window support.

The disadvantage of using gap windows as a support level is that we also take the common gaps into account. Common gaps are most of the time closed within a week on a daily chart and therefore not very useful as a support level. It is however almost impossible just to select the breakaway, continuation or exhaustion gaps and not the common gaps. Some way we will have to compensate for that later on. More information on gap windows can be found in stocata video 10 about windows.

We are now left with the fact that price can move up a number of days without creating pivot or gap window support. When the trailing stop moves too far away from the price action in these circumstances we will enforce a maximum percentage allowed loss.

 

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After introducing a minimum required gap size and allowing some extra space below the gap, it now looks like we have a basic stop loss that is closely following the price action in an uptrend.

Remember we still have to compensate for the common gaps that I could only partly correct by introducing a minimum required gap size. An easy but effective way is making use of the high price. We will not close a long position when the TR&NDS trailing stop is broken by the closing price, but only when broken by the high price. Look here at TR&NDS in action in an up move.

To complete TR&NDS we have to define the formula for the downtrend move. One possibility is to use the same rules for the downtrend as for the uptrend. Question is, do we want a very close trailing stop for the downtrend considering we only want to trade long positions? Making money during medium and longer term downtrends, trading only long positions is very unlikely. We probably are much better of just staying out of long trades during medium term downtrends. So I prefer to use a modified ATR trailing stop to keep us out of the trade as long as we are in a medium term downtrend, as you can see in this chart.

And this is the complete Metastock formula for an auto switching TR&NDS trailing stop. You can find this formula at stocata.org/metastock/formulas.html. Remember the buying and selling rule: buy when the high price moves above TR&NDS and sell when the high price falls below TR&NDS.

In this chart you can see how TR&NDS follows very close the price move in an up trend while leaving enough room for price reaction during a down trend.

Using your own trading entry method you certainly want to be able to use TR&NDS with your own entry date and initial stop level as shown in this chart. The breaking of the TR&NDS trailing stop is signaled with a down turn.

And this is the complete Metastock formula for the TR&NDS trailing stop from a start date. You can find this formula at stocata.org/metastock/formulas.html. Remember the selling rule: sell when the high price falls below TR&NDS also signaled by TR&NDS turning down.

This is the end of the part about the TR&NDS trailing stop. Next we will apply our technical analysis knowledge presented in the videos practicing some trades. Tell your friends about these videos and while visiting my website order my new book “Capturing Profit with Technical Analysis”, a complete technical analysis reference and a winning trading system. See you in the next video!

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