Trailing Stops

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





9 thoughts on “Trailing Stops”

  1. Hi Ray, that is really good info,thank you.
    I found to “paint clear picture” was the key for me. I use an initial stop based on ATR,to calculate my risk. I found a script to calculate this for me. I use that initial stop as a never exceed, in case of emergency. I then trail a stop a candle behind. Its a bit simplistic but i took the view ,if its a pullback, i can always re enter. But the main thing was it gave me a clear definition of exit rather than to hope or wish.I found the whole process of trading, for me at least, was to overcome my mental weaknesses in certain areas of the trade. By reading this blog also motivates me too, to be more disciplined in my trading and a general overall well being from reading about something that i love doing. Most people hate mondays and have humpday wednesdays, i love mondays and hate fridays now. thanks Ray cheers Baz

  2. hi Ray,
    1. For what were taught in HOS 2011, could we have both qualitative and quantitative stop-losses?

    2. Do you believe in using trend lines, moving-averages etc. to place the stops?



  3. Hi Paul

    1. Yes both kinds of stops – that is what I was saying in the blog.

    2. Short answer, generally no. One exception comes to mind. I do use the Ray Wave 2-4 trendline once a wave 5 high is confirmed.

  4. hi Ray,
    Many times, after being stopped out, the market continues to move in the direction of the closed trade immediately.

    “I should have …” lol …

    Just curious,
    1. do you keep statistics of both types of stops, how “accurate”, “success rate”?

    2. analyze the success & failure of the stop?

  5. Also,
    1. the success rate of using Ray Wave 2-4 trendline once a wave 5 high is confirmed?

    2. as stop-loss as well as trailing-stop?

  6. Hi Paul

    I keep stats on the type of stops. Success depends on how well I am trading. When in flow, I don’t get stopped out because I have exited before the stop gets hit. When in ebb, I get stopped out.

  7. hi Ray,
    As expected, no wonder Penfold called you Master Trader. 🙂

    Stops (for those who trade with stop-loss and/or trailing stop) are very critical for successful trading.

    But many traders have emphasized only on Entries.

    I would not ask you any more questions, but hope to see many of your readers pose the “Stop” questions to you.

    Haha, may be as a start, Baz could ask you to comment on using ATR to place stops,
    HOS graduates – do they have the knowledge to determine qualitative stops, if so, how …

  8. Hi Paul

    HOS was not taught to use qualitative stops. I have enough of a hard time getting newbies to place quant stops.

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