Conditional Changes

This is my favorite method, and here is how I define a conditional change: It is the last higher closing high or lower closing low. Such as the case with a spike top, the market does not close above an old high. Therefore, one factor such as the SCO order will be of great use to a trader not looking to get bumped out of a position. There is, as with any stop, the unknown risk that there is not a guaranteed price at which your stop order will be filled. This order has a negative connotation among traders as it spells out too much risk. A buy stop will be elected and knock you out of a position if the market closes above the stop price; and a sell stop will be elected and knock you out of your position if the close is below your selected price level. The unknown is how far away the market will close from the selected stop price. The key benefit in using a stop-close-only is that it keeps your risk defined to a conditional change and helps you from getting knocked out of a position from intraperiod volatility. SCOs are for end-of-day trading and can be placed on most trading platforms. The concept can be used for day trading; however, it must be used manually because most platforms do not accept intraday SCOs. Some consider this as a mental stop, which is a predefined risk factor. However, many traders violate the rules once a signal gives an exit; they don't exit, and their losses are increased.

The challenge in selecting the right stop is to not be shaken out of the trade by market volatility. A variable may be used to place trailing stops that adapt to market volatility, which combines enough sensitivity to price changes with flexibility to fit your trading needs. Using this combination, in fact, may well provide an extremely profitable stop for the intermediate-term trader. Trailing stops are used in an attempt to lock in some of the paper profits that could accrue should the market move in the direction desired. Like an ordinary stop, the trailing stop is started at some initial value; but then it is moved up (in a long trade) or down (in a short trade) as the market moves in your favor. It is important to try to maximize your trading results and to stay in profitable trades as long as possible. Employing stop-losses and profit targets of the wrong sizes can ruin a trading strategy, making it perform significantly worse than it would have otherwise. Testing has demonstrated that a proper combination of even simple exit methods (such as placing sell stops below the low of the past two days when going long) can substantially improve the behavior of a trading strategy, even turning a random, losing strategy into a profitable one! Another less complicated method to use for a bullish trending market condition is to place a stop below the lowest low from the past 10-day period. Another one of my favorite methods is a trailing stop using the lowest low or the highest high from the last conditional change candle. I define the last conditional change as a higher closing high or a lower closing low. This is a much more important event than a higher high or a lower low since those price points are simply spikes. Buyers who stepped in on the open have a strong conviction that prices should expand to new higher territory once the market established a new high ground; and when the close is higher than the open and the market closes higher than a previous high, then the market is demonstrating significant strength. When you see a lower closing low as the lows are violated, then the market is demonstrating significant weakness. In turn, under these conditions, we should expect to see weaker or lower prices.

Let's examine this conditional change method on a day trade with a chart example using the spot euro currency from July 10, 2006, using a 15-minute time frame. Figure 10.3 shows a low close doji trigger to sell short at 1.2796. The initial stop per the LCD trigger states to use a stop-close-only above the doji high. That would be 1.2812. As you can see, the market stalls in a traditional sideways channel that the forex market is famous for; but it never really gives any pressure on the trade. As the sideways channel forms, at the end of the channel, notice that another low close doji sell signal materializes; and this time the market closes below the channel support trend line multiple times.

According to the trading rules, your stops should be placed initially above the doji high. If you were short from the first signal, then use the second doji as your stop point still using the SCO method. Once prices start to move lower, trail your stop above the highs of the candles that make new lower closing lows. At the end of the run, we want to trail the stop above the high of the last conditional change candle that made a lower closing low. If the market is to remain bearish and continue in a bearish trend mode, we should not see the high of a conditional change candle tested. Generally, when we do, that is a sign that the market condition will either enter in a consolidation phase or will reverse. Either way, it generally marks the time to exit the position.

SFIJR-USrV FurrWUR Dollar MS miruitf* haral *»".G*<vt>tftcom

SFIJR-USrV FurrWUR Dollar MS miruitf* haral *»".G*<vt>tftcom

FIGURE 10.3 LCD Triggers a Short: Initially Use a SCO above the Doji High

Used with permission of GenesisFT.com.

FIGURE 10.3 LCD Triggers a Short: Initially Use a SCO above the Doji High

Used with permission of GenesisFT.com.

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