Using the moving average and bullishtrending candlestick patterns to pick long exits and determine stop levels

Making a wise decision when it comes time to pick an exit point or stop level for a long trade can be the difference between booking a tidy profit and suffering a frustrating loss.

In the preceding section, I explain how you can use moving averages when you're deciding when to get in on a long trade, but you can just as easily use them when you're trying to figure out when to exit a trade. If you're in a long position and a moving average reading tells you that the trend is headed for a reversal, be prepared to sell and get out. Allow me to elaborate with a couple of examples.

An entry and exit with a single moving average and bullish pattern

Figure 14-7 is a chart of the oil giant Exxon Mobil (XOM). Over the course of several days, the stock on this chart establishes an uptrend and it's solidly over the ten-day moving average. Although quite a bit of ground has been covered, the bullish thrusting line pattern shows up, and the conditions are ripe for a buy signal.

Figure 14-7:

A chart of XOM where a bullish thrusting line pattern and a 10-day moving average provide an exit signal.

Figure 14-7:

A chart of XOM where a bullish thrusting line pattern and a 10-day moving average provide an exit signal.

Benefit Candlestick Patterns

After the buy signal, the stock continues to work its way higher until there's a break of the ten-day moving average. That break signals the potential end of the uptrend, and it means that if you entered a long position after spotting the bullish thrusting line pattern, you need to exit. The price at the exit is high above the level of the pattern, so you walk away with a tidy profit. Not bad!

jjcJABEff Setting stops is trickier with moving averages than it is with trendlines. You can anticipate the level of a trendline because it's simply the slope of the line moving forward by a day (or other time period). However, the moving average level changes more erratically, depending on the price action.

If you can't constantly monitor your trading positions, use the previous day's moving average as a stop. If a security dips below the prior day's moving average, initiate a sell.

In the case of the XOM trade in Figure 14-7, a stop should've been in place because the price continued to fall and settled well under the moving average on the day it broke this support level.

An entry and exit with two moving averages and a bullish pattern

Another example of how to combine moving averages with bullish candlestick patterns comes in the form of Figure 14-8, a chart of the futures contract that trades based on the level of the United States ten-year Treasury notes. This chart has a great uptrend that can lead to a very appealing entry and exit if a trader makes the right moves.

Figure 14-8:

An entry and exit with two moving averages and a bullish pattern.

Figure 14-8:

An entry and exit with two moving averages and a bullish pattern.

The bullish thrusting line pattern appears several days into the uptrend, but it's so close to the ten-day moving average that it's hard to think that the contracts have gotten too far ahead of themselves. Looks like a pretty reasonable level to enter a long trending trade.

After the entry has been executed, things continue to go swimmingly with the 10-day moving average staying above the 20-day moving average. The 10-day and even the 20-day moving averages are violated by the absolute price of the contracts, but that's not an exit signal because the trend changes when the 10-day moving average moves under the 20-day. In this case, keeping that in mind keeps you from getting out of the trade too early and missing profits or even taking a loss.

The added check offered by the combination of two moving averages is one of the primary reasons I use more than one moving average with my candlestick charts whenever possible.

The downside to using two moving averages is that you have a tougher time figuring out just where to set your stop orders. If you want to use a moving average crossover as an exit signal, you may find it very hard to do so if you have a job or another reason that you can't check in on your trades throughout the course of the day. Some commercial software packages send you an e-mail when a crossover is imminent, but if you can't access your e-mail all day, that's not much help.

My advice is that if you want to use a moving average crossover as your stop level, don't worry about a crossover that may occur during the day until the moving averages get close to each other. After you see that happen, you can start to estimate where an appropriate stop should be placed. And you can always just wait until the crossover has occurred and exit on the following day, if you can deal with the occasional slight erosion of your profits on a trade.

0 0

Post a comment