When prices enter the Retracement Zone, consider at what price you may want to liquidate your long position. This does not mean that you will HAVE to liquidate your position, just because prices are in the Retracement Zone.
Just the opposite. Now is the time to insure current profits, and maximize future profits. There are three ways in which this is done - by stop order, by market order, or a combination of both.
Chart 18 is a "zoomed in" section of Chart 16. The time period is from 10/ 24/88 to 12/29/88. The RZH and RZL of Chart 16 have been entered on the chart as well as stop-loss lines S4 and S5, defined in Part II, "Definitions." Rather than connecting highs or lows, stop-loss lines S4 and S5 are drawn from minor highs and lows, at one of four Gann geometric angles.
S4 is drawn from P3 at a 26-degree angle (this is actually the inverse of 63 degrees). This will be an initial stop-loss line should a short position be taken after prices react to the downside from the area of the Retracement Zone High.
In order to "let profits run," S5 is drawn from a minor low or high reaction point. This will be a point from which prices will trend into the Retracement Zone. Such a point is on 11/4, at a low of 5633 (a minor Gann Pivot Point).
The Gann angle for S5 will be determined by using a protractor. This angle will usually be 63 or 75 degrees. In a slow market, it may be 45 degrees and in a fast market, 82 degrees. S5 should not be too "tight" for the specific price range. Prices need room to "move." In Chart 18, S5 is 63 degrees from 5633 on 11/4.
Each day, continue moving your stop-loss order up, along the stop-loss line from 5633, until the stop-loss order is filled. This is in consonance with the trading axiom of "letting the market tell you what to do."
On November 25, the day ends with a lower high and a lower low than on the previous day. The stop for the following trading day, November 28, would be at 5845, the S5 level for 11/25. Your position would have been stopped out, with handsome profits, on the opening of 11/28 at 5820.
Close-only, rather than intraday, stops could be used to eliminate intraday price fluctuations. Some technicians feel that closing prices reflect the "truer" trend of the market. (I wonder how many "close-only" stops were in place on "Black Monday?")
Intraday stops are safer in that you know where your position will be liquidated. Some profits may be cut short using intraday stops. You would benefit, though, by having your cash in the account rather than in the market.
Each day, as prices continue to trend through the 50% Retracement Zone, move your stop-loss order up along the S5 line, to the price level of the CURRENT, or PREVIOUS, day.
If you don't "feel right" about the market, or are satisfied with your profits, use the S5 price level of the CURRENT day. Intraday price-reactions, though, may limit your profits and "stop you out" prematurely.
If you're confident of the trend continuing and want to allow for some market "vibrations," use the S5 price level of the PREVIOUS day. However, should a sudden reversal occur, some profits may be lost.
Using the current, or previous, day S5 price level for stops is a personal choice.
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