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Chapter 9 —Pick Your Poison... and Your Protective Stops
4. Five-Period Simple Moving Average
Here’s another observation in my
ongoing analysis of tradable moves:
I notice that when a market trends,
its closes tend to stay above a fiveperiod
simple moving average of
the close. And as you can see, the
levels identified in Figure 81 are
significantly tighter than the levels
in any of the preceding price charts.
So as not to miss out on a developing
trend, I often set a protective
stop a few ticks above or below the
high of the first bar that successfully
penetrates the five-period moving
average on a closing basis.
Figure 81
My 2 cents overall: As a result of many
years in search of the perfect protectivestop
technique, I have discovered that there isn’t one. So when deciding which stopping technique to employ,
I suggest you choose one that matches your own trading style best.
My best advice: If there is a single gem I can offer in regard to using protective stops, it is this: If you’re confident
about a trade, give it plenty of breathing room. If you’re not, then keep your protective stops tight.
[July 2006]
The Ultimate Technical Analysis Handbook — © 2009 Elliott Wave International
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