How To Trail A Stop Webinar Part 3
How to Trail a Stop Webinar
How to Trail a Stop Webinar
Transcript Part 3 of 5
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So here, Im combining those two. Really, were going four bars back in this case but thats just a little. Thats just the way I do it. I know some traders dont do that but thats what I I found to be very effective. And you could see how it continues lower. You can continue trailing that stop down 1, 2, 3, I mean were down to here now. And notice here, this is where we would have been stopped out. This little doji here makes a lower high and we count back our three bars. Weve got our stop right above that bar number two. The high was 677.1 so we take our exit at 677.2 and thats our exit. And thats how the trailing stop works and that did add to our bottom line on that one particular trade.
Now, what I want to point out to is an alternative method and I chose this example because it illustrates the point I want to make, you dont have to use the three bar stop or you can use a combination of methods. This white like that you see here is the momentum indicator, the MOM set to 11. And one thing I noticed about this as a trailing stop is that once you exceed your fixed target and the trade is well underway to heading lower, usually the momentum indicator is going to catch up to your price. And when it finally does, you can use that as a trailing stop. It tends to work really well and youre going to have to look at a bunch of charts to really see it in action but youll notice that theres some point in an extended move where the momentum indicator will catch up to where the price is trading and it will really present a nice place to trail a stop.
And in this case, it was a little bit looser than the three bar stop and would have kept you in for much stronger move down. And if you continue to follow it, youll see it was a significant move and finally takes about somewhere around here.
Mark Soberman: And Troy let me interrupt you real quick. So the key here, though, is that youre saying is after you hit the fixed target is when you would consider kicking in with the momentum indicator. And just so its not confusing to anybody, the momentum indicator is something that comes with our HVMM strategy so people are wondering what that is, just they know what that is.
Troy Noonan: Oh, yeah, thanks, Mark. Thats true. The momentum indicator takes a little bit more finesse to learn but if you start applying it and looking at your charts, youll notice that at some point its going to catch up to the price action and then it makes for a really great trailing style. You catch some bigger moves in the three bar style. So a lot of the times, what I will do is I will compare the two when Im back testing. I might even put in three positions on my spreadsheet and Ill have one of those exits coming out using the three bar stop and another exit using the momentum indicator and I might even have a specific rule that Im only going to use the momentum indicator if its gone, you know, so far beyond the fixed target. And then Ill kick that one in and eliminate the three bar stop so you can be really creative.
Another thing that you can do is trail this other indicator that also comes with the HVMM and thats this profit line is in red lying here. And that also makes for really nice trailing stop and it could really keep you in for some big moves. But because its slower, it will get you out slower and so you may find that you give back some of that move but, you know, there are times when they can really keep you in. I mean it can keep you into a trade for a really long extended move. Theres no --
Mark Soberman: Hey. Troy, can you answer one question here. I know were going to wait a little bit. This might be a good time to answer it. There was a I think a couple of people asking the same thing. How do you choose that candle to start counting backwards? Can you kind of repeat that a little bit, a little slower?
Troy Noonan: Sure. Yeah, sure. The three bar stop, what youre looking for on short trades is a bar that makes a lower high from its prior bar, the one bar to the left, a high a lower high. So on a long trade, youre looking for a the prior bar that makes a higher low. So look on the right of the chart here, these four green bars. Each one of those bars makes a higher low than the one prior. You see that? So the fourth bar on the right of the chart where the plus sign is above. That bar has a higher low than one bar to the left.
So when you identify a bar that makes a higher low, look in the long trade now, this one for example. Once that bar closes, you count it as one. You dont count it until the bar is closed so it would be here actually. You would already see the next bar forming. So this bar is close, you count it as one. The next bar to its left is two and one bar more over to the left is three. Those three bars youre going to put the stop below the lowest point of those three bars. Its either going to be bar number two or bar number three. It will never be bar number one because, well, bar number one has a higher low than the one before so it cant be bar number one.
So hopefully thats clear. Notice that the next bar close with even a higher low so you start your you reset your count. When this bar closes, that becomes one. The next bar becomes two, the next bar becomes three and youre moving your stop up to a tick below it and you continue to trail. Thats if we were in a trade, of course. Notice that the next bar didnt make a higher low, it made a lower low. So we dont do anything with our stop. We leave it right where it is but then the next bar does make a higher low.
Remember, youre only looking to one bar to the left. So the bar on the far right, that little doji, it made a higher low once it closed and so were going to count that as bar number one. The next bar over is bar number two. The next bar over is bar number three. Notice that bar number two in this case makes the lowest low and were going to go one tick below that and thats where were going to park our stop.
Now, of course, we would respect the key level and put it just a little bit below 676 but that is how the three bar stop works. So what happens is the it keeps moving forward. You get bars that make higher lows. And every time you do, you reset your three bar count and you continue to count back three bars. So this stop would have trailed up to there, for example, and then it would have stopped out. Of course, thats if we were on the trade but thats the way the three bar stop works.
So should I maybe pause for questions on three bar stops or show --
Mark Soberman: Yeah, let me lets just answer a couple here since theres one from Dan saying, Is the back testing a visual check of the charts aftermarket hours compared with the spreadsheet data?
Troy Noonan: Okay. When youre back testing, that implies that its aftermarket hours, so the markets have closed. Youre looking at historical data and youre trying to find trade setups that fit within your system and instead of going in with one position, you go in with two positions but you come out with your different exit types, one of them with a fixed target, one of them with a trailing stop. And so the more as you continue to put those trades into the spreadsheet, you start to build up some statistics and see results so thats how you begin.
Mark Soberman: You know, the key is all about having confidence, right, Troy? I mean, otherwise, when you trade with real money, youre not going to be confident if you havent already done this work.
Troy Noonan: Yeah. Well, confidence is critical obviously or youll end up, you know, making decisions that are not whats intended. Its not what the system is intending you to do. Youll make human decisions that have nothing to do with the right trade decision. So yeah, confidence is critical but its also helping you indentify an effective strategy because when youre looking to trail a stop, youre kind of exploring. Youre trying to find something thats going to work for you overtime.
Remember, a lot of these trades are not going to give you extended moves, theyre going to come back up if you look back here where this fixed target was on that short trade example. A lot of trades are not going to go much further. Theyre going to come back up and stop you out. And so, just keeping the fixed target was obviously a better choice on that one particular trade.
So our minds dont have the ability to process, you know, all the trades all at once where we could actually get a feel for the overall result, over lots of trades, thats where you need the spreadsheet, okay? Because were just remembering the last trade or two or three, were not remembering the last 100 trades. So I hope that answers that.
Mark Soberman: Yeah. Bruce asks, On the back testing, how often do you do it to check which parameters you want to use and how many trades do you need to ensure validity?
Troy Noonan: I found that when you get up to around 70 to 75 trades, I found that, you know, its either happening or it isnt. In other words, I usually find that my results start to stabilize. I start, you know, kind of settling in on a winning percentage and then it vacillates very little from there. So I think that 100 plus trades, youre going to be in a pretty decent place.
Now, market conditions do change and when Im done back testing, Ill forward test. Ill start making sure that its a viable strategy and that I could trade it live and Ill practice it in a sim account. And Ill continue to put those trades in the spreadsheet and Im looking to see some stability in my results. I dont want to see too much, you know, swinging up and down as far as the volatility of my results. I want that winning percentage to stay, you know, pretty stable. Youre going to catch some losses of course. Theres always going to be times when you hit some drawdown but then the winners shouldnt be far behind that. You should be able to climb right back up and stay pretty steady.
So, Mark, in this case, the spreadsheets that I showed you, there were 228 trades, but really there were half that amount. You know, there were, what, 114 because I put two positions in for each trade. So on 114 trades, it provided a 67.5% winning percentage and the trailing stop was actually very profitable.
Mark Soberman: A couple of other questions asking kind of the same thing. People want to know, Do you start this three bar stop method after youve hit the full target or are you doing it all long as youre trading?
Troy Noonan: Thats a really great question. But you know what, its all about a trade plan. I mean theres lots of ways to draw Xs and Os on a blackboard and put together, you know, football formations and strategies and this and that. I like to use that as an analogy because its similar to this. The answer is yes and no. I mean the way Im doing this strategy here is that lets look at this chart again. If youll see this one setup that we were just looking at the short setup and Ill give you a quick overview of what Im doing.
When I get to this yellow line which is the money management level, at that point, that trade has proven itself enough to me where I no longer want to take a loss on the trade. And so Im going to make sure that Im locking in one tick, for sure, covers the cost of my commission. But Im really Im locking in one tick on the position that Im planning on trailing.
At this point, Im going to put in my three bar stop for my fixed target position. The position that I want to come out at my fixed target, Im going to put in the three bar stop. So right here on this red arrow, it hits the money management level. The bar closes. Ill count back 1, 2, 3 and Ill put that that stop is going to protect my fixed target. The red line is one tick locked in on my trailing stop. So this happens really fast because it was a compressed market and small setup it actually took me, you know, took me out of full target and it was a move point. But if it came back the other direction, I would have stopped out with a little partial profit but I still would have had a little more breeding room with my fixed target I mean my trailing stop position. And what I find is, sometimes the market will then turnaround and take off and actually, give you a nice big trade.
So I am using the three bar stop. Once I hit the money management level with one of my two positions. Now, once I get taken out of my fixed target position, now I put the three bar stop on my trailing stop position. So now that Ive hit my fixed target, that bar closes with a lower high that becomes bar number one, bar number two, bar number three, and Im now moving my fixed my trailing stop on my trailing stop position to here. And Im starting to ratchet up, ratchet down I mean my stop and lock in more and more. Now, as it continues to go down, I mean we just went through the exercise, this stop trailed all the way down and it finally got taken out right here I think. Yeah.
So I hope that answers that question but this isnt necessarily going to work on every single chart you look at. I mean I went through a lot of trial and error before I came up with this trade management strategy with the 144 tick with the settings that Im using and the strategy, the HVMM 2010 that Im using.
Mark Soberman: Troy, just will try to go through some of these a little bit quicker so we got quite a few questions here. I know you still have some more what else do you have to show some other trail stops or just something that you wanted to show.
Troy Noonan: This is the main one. I mean I was going to maybe show an example of how to use a two bar stop but I mean I dont its just kind of a variation of the theme so
Mark Soberman: Yeah, maybe show on another while were answering questions go to a different little later on this one or a different chart or a different market just something kind of, you know, while were talking to have some other example
Troy Noonan: Okay.
Mark Soberman: In case, youre talking through a little bit.
Troy Noonan: Sure.
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by: John Jay
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