BarroMetrics Views: Trailing Stops
Baz wrote” ….if we take a trade based on high probabilities, how do we know if its a high probability to continue, at what point does the high probability diminish. Then at what point does it register in our brains to exit”.
The point is we need to paint clear pictures about what has to happen for us to exit a trade …. what I call a qualitative exit. My quantitative exit (initial stop)is not the same as my qualitative exit.
The stop is the price at which my trend analysis is incorrect or trade analysis is incorrect. The qualitative analysis are the conditions under which I’ll exit a trade even if the stop is not hit.
Trailing stops tend to be quant exits, but need not be.
Where my quant stops are placed depend entirely on the structure of the market – because their location identify where my view of the market structure is incorrect.
An example of a qualitative stop: in a recent GBPAUD trade, I took the view that the 290-min chart was showing the Ray Wave 3rd of a 3rd pattern. This implied we would see a strong directional move. When instead of a prolonged move down, the directional move went mean impulse and started to stall, I exited on the first bar that suggested an upward move was beginning (see Figure 1) – because the market was not behaving in a way that was consistent with the reason I took the trade.
Figure 2 illustrates my approach to a quant trailing stop.
I was long gold going into the June high. (Note for long term charts I use CSI-data’s perpetual series – useless for entry and exit prices but excellent for long-term analysis).
The first warning that we may be seeing a high was the price action at D. The spike down was the greatest retracement since the Jan 28 low. For me it marked the ‘preliminary point of support’; if this were true the next high and sell-off would mark the buying climax.
Using C, I then calculated some price targets:
- The 13-week swing (black lines) suggested that the high at C was in a zone that may terminate the upmove.
- The 18-day swing (red lines) showed a 3-wave structure that suggested a termination at the 30 % to 33% increase. The C high was within the target zone.
At E, Gold provided an upthrust change in trend pattern. That was enough for me to exit the trade. At time of exit, the stops has been raised to below the low at D.
Hope this helps Baz
FIGURE 1 GBPAUD
FIGURE 2 Gold