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Trading > Stop Loss Orders > Adjusting Stop Loss Orders

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.

Only a break in the trend (or large correction) will stop you out.

Using Moving Averages

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.
Example

Johnson & Johnson is charted with a blue 63 day exponential moving average. Stop loss order levels are depicted by yellow horizontal trendlines.

Go long. The signal is taken when price respects the MA. Place a stop loss (shown by the start of the trendline) below the Low of the most recent trough or below the MA, whichever is lower.Move the stop loss up to below the MA at the next troughMove the stop loss to below the Low at the next trough (this is lower than the MA)Move the stop loss to below the MA at the next troughThe stop loss is activated when the next correction falls below the previous troughJohnson & Johnson: stop loss with moving average

  1. 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).
  2. At [S2] move the stop loss up to below the moving average at the next trough.
  3. At [S3] move the stop loss to below the Low at the next trough (this is lower than the moving average).
  4. At [S4] move the stop loss to below the moving average at the next trough.
  5. The stop loss order is activated [X] when the next correction falls below the previous trough.

Ranging Market

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.



 
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