Wednesday, September 21, 2011

Stoploss and range expansion

Rocky has posted a number of similar comments relatng to Range Expansion. Hi Rocky, I did reply to your question on Sept 15. Please read the post . Range Expansion is a valid means of making a partial or complete exit for day traders and swing traders. Since day trading is limited by time, any big thrusting move in our favor should be used to take profits. The concept is not needed for trend trading, because trends are not limited by any time constarints.

In the post on trading a bullish head and shoulder pattern, I suggested keeping a stoploss below the low of yesterday - because yesterday(tuesday) was a wide range trending day. avv says "Very useful post. I have a question with stop loss setting. The average true range on nifty (14days) is about 115. In that circumstances won't the chances of one getting stopped out with 5050 stop loss almost guaranteed? Does stop loss has to be multiple of ATR to avoid getting stopped due to noise?"

My Notes: A stoploss can be any one of many methods. Each of the methods will give equally satisfactory results - the purpose is to protect against unneccessary losses. It is important to be consistent. For the head and shoulder pattern, the wide range day should hold if upside momentum is going to continue. On this basis, I suggested a stop below the low, which is 5035. The classical stop is below the right shoulder - 4900, but this stop is too wide and certainly represents a failure of the pattern much before it is reached.

Peter Brandt has an excellent blog where he discusses chart pattern trading. The idea of keeping a stop closer to the neckline comes from his book - Diary of a Professional Commodity Trader. I found that keeping the stop closer to the neckline makes the trading of head and shoulder patterns, much easier.

On ATR stops, if you develop a system based on using the ATR as a stop, you should have a multiple of the ATR - say 2 times the ATR. In the case of the head and shoulder, a move below the wide range bar will negate the upside momentum, so the ATR is not used here.


Rushabh Shastri said...

for current nifty trading for short sellers, as you disscussed 5165 closing basis is a stop loss for a positional trader....till 5165 not ruled out at current level BEAR is safe....depending on coming days this point of 5165 may differ.

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