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c07 JWBK182-McDowell April 25, 2008 15:58 Printer: Yet to come
58 A TRADER’S MONEY MANAGEMENT SYSTEMbottom left-hand side of the chart is bullish and the initial stop is placed
at the base leg of the pyramid trading point marked with a P.- Trailing stop.Develops as the market develops. This stop enables
you to lock in profit as the market moves in your favor. See Figure 7.1,
where the three up triangles marked P follow the initial stop loss that
we set on the very first up triangle. These following three up triangles
lock in profit as the bullish trend moves in our favor, and each stop is
moved up to the base leg of each new up triangle. We exit the market
when the market goes against us and our stop is hit on the up triangle
in the upper-right corner of the chart. - Resistance stop.This is a form of trailing stop used in trends. It is
placed just under countertrend pullbacks in a trend. - Three-bar trailing stop.This is used in a trend if the market seems
to be losing momentum and you anticipate a reversal in trend. - One-bar trailing stop.When prices have reached your profit target
zone, use this stop. You can also use it when you have a break-away
market and want to lock in profits. Usually, use it after three to five
price bars move strongly in your favor. - Trend line stop.Use a trend line placed under the lows in an uptrend
or on top of the highs in a downtrend. You want to get out when prices
close on the opposite side of the trend line. (See Figure 7.2.) - Regression channel stop.Use a regression channel to set your stops.
Very similar to a regular trend line, but the regression channel forms
a nice channel between the highs and lows of the trend and usually
represents the width of the trend channel. Stops are placed outside the
low of the channel on uptrends and outside the high of the channel in
downtrends. Prices should close outside the channel for the stop to be
taken. (See Figure 7.2.)
Other stop possibilities are usually derivatives of one of these seven
stops. Setting stops will require judgment by you, the trader. Judgment is
based on experience and the type of trader you are. You will set your stops
based on your psychology and comfort level.
If you find you are getting stopped out too frequently, or if you seem to
be getting out of trends too early, then chances are, you are trading from a
fearful mindset. Try and let go of your fear and place stops at reasonable
places in the market.
Position your stops in relation to market price activity; don’t pick an
arbitrary place to set your stop. Many traders incorrectly choose a stop
so their loss is the same exact dollar amount each time they are stopped
out. By doing this, they are completely disregarding the meaningful market
support and resistance areas where stops should be set.