Picking long exits and determining stop levels with trendlines and bullishtrending candlestick patterns

In addition to confirming trends and letting you know when to get in on a long trade, trendlines can also help with your decisions on when to exit a trade. Put simply, a bullish trendline may serve as an exit point when it occurs in a bullish trend. It's not always easy, because trendlines are constantly changing, but that can also be a plus because the trendline is moving in the same direction of your position (higher). Sound confusing? Let me clear things up with a couple of examples in the next sections.

Figure 14-2:

A chart of QQQQ with a bullish trendline and a bullish thrusting line pattern.

Trendline and patterns for entries and exits

Figure 14-3 is the same chart I use in Figure 14-2, but the trendline has been expanded a bit to include a level where you exit a long trade if you use the trendline to define the prevailing uptrend.

Figure 14-3:

A chart of QQQQ where a bullish-trending candlestick pattern and a bullish trendline indicate an entry and exit point.

Figure 14-3:

A chart of QQQQ where a bullish-trending candlestick pattern and a bullish trendline indicate an entry and exit point.

Entry And Exit Candlestick Patterns

Once again, the pattern is a bullish thrusting line pattern that pops up in an uptrend, and the trendline, which offers a support level for the uptrend, is established. In a nutshell, if the stock continues to trade above this line, it's still in an uptrend. And as long as it's in an uptrend, you want to be on board with a long position!

You can clearly see the exit level in Figure 14-3. The stock has a day where it drops below the trendline, and that's where you want to get out. In fact, placing a stop order on the level of that trendline would be a good idea, so that any dip below it would result in an exit. You may be a bit dismayed shortly after because the stock quickly recovers and the trend resumes for a few more days. There was still a little more money to be made, but you can take comfort in the fact that you followed the rules and exited the trade when it was prudent. Hindsight is 20/20, of course, and in the long run you come out ahead if you stick with your rules.

Another entry and exit with a trendline and bullish pattern I provide one more example of how you can use a trendline alongside a bullish candlestick pattern to pick an exit level in Figure 14-4. The chart in this figure is for the stock of General Electric (GE). At this point it's pretty difficult to get away from GE if you're living in the developed part of the world.

Exiting with a trendline

You may be wondering how it's possible to use a trendline as an exit stop level because it moves every day. That's a valid concern! Unlike the set points associated with candlestick patterns, a trendline's level on a chart changes daily. You can deal with that challenge in one of two ways:

i The first is to determine the level of the support trendline each and every day, and place an appropriate stop order that's good only for that day. That strategy works well because the line moves with the trend and your exit point moves accordingly daily. On the downside, you do have to commit to making the change every single day, which can be tough for some busy amateur traders.

i Second, you can choose to exit the trade only if the closing price is lower than the trendline. Going with that strategy keeps you from having to place trades everyday, but it does require you to check your chart toward the close of each day. It's attractive because it can keep you from getting stopped out of a potentially valid trade if the price happens to take a slight dive. On the flip side, though, the price can fall dramatically under the trendline during the day and close at a low level as well, meaning that your exit would be far lower than if you went with the first stop level strategy.

Figure 14-4:

A bullish candlestick pattern and a trendline point to an exit on a chart of GE.

Figure 14-4:

A bullish candlestick pattern and a trendline point to an exit on a chart of GE.

The chart in Figure 14-4 is interesting because the bullish neck lines pattern appears and there's an uptrend in place, but what to do in terms of trading action is a little blurry. The prevailing trend is a long one, and the pattern occurs with quite a lot of price difference between its close and the trendline that would be drawn at that time. (The trendline on the chart would be old news by then.)

Even though the trend is your friend, sometimes stocks get so far ahead of the trend that holding out for a better entry price — on both the long and short side — or possibly just skipping the trade altogether is wise. The example chart in Figure 14-4 proves prudent to pass on the trade, because if a long position is initiated, then its exit level comes up rather quickly and the trade appears to be a small loser.

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