title:(TSR) Why Are We Giving Away These Trailing Stop Loss Tips for Nothing - This

Is Not A Misprint
author:David Jenyns
source_url:http://www.articlecity.com/articles/business_and_finance/article_6188.sh
tml
date_saved:2007-08-23 17:04:55
category:business_and_finance
article:
A trailing stop loss is calculated in a manner like the way we calculated our
initial stop loss. The only difference being that while we calculated our stop loss
from the entry price, we're calculating our trailing stop loss from the highest
price since entry. The key to the trailing stop loss is that you need to make
continual adjustments to make sure that the stop is moved in your favour.

The method that you use to set your trailing stop loss can vary dramatically.
However, if we use the ATR method that we used to calculate our initial stop to set
our trailing stop loss, we'll have the ability to lock in the profit as the share
price increases.

For example, if you bought a share at one dollar, and your initial stop was set at
90 cents, your trailing stop would also have a value of 90 cents. If, after the
first day, the share price moves in your favour and moves to $1.10, you would
recalculate your trailing stop loss by subtracting two times the value of the ATR
from the new high price of $1.10. For simplicity, let's assume that your stop size
hasn't changed, and is still ten cents wide. When you calculate your new trailing
stop loss, by subtracting the 10 cents from $1.10, it would be set at one dollar.

At this point, your initial stop was at 90 cents, and your trailing stop loss is
now at a dollar, with the share price is at $1.10. Since your trailing stop loss is
higher than your initial stop, the initial stop becomes obsolete, and our trailing
stop loss becomes your active exit.

Now, my question is, How much profit have you made on this trade The share price is
at $1.10 and we entered at one dollar. If you thought, No, I haven't made any
money, then you'd be right on track. Remember, our stop loss strategy gives the
share price a little bit of room to move.

You're not going to exit this position until the share price reverts to one dollar.
I'ts important to note that when you are valuing any open position, you should
always value it based on its stop loss value, since if you were to exit this share,
you would wait until that price point was breached.

Let's go back to the example. Now, what happens if the share price begins to fall
Let's say that the share price falls from $1.10 down to $1.05. What does your
trailing stop loss do Would it move down also Here's another important point. A
stop loss will never, ever move down. A trailing stop loss can only move up. This
ensures you lock in profit and that you'll also get out of the shares once they
start to turn. A trailing stop loss is always calculated from the highest price
since entry, so the highest price is still $1.10.

It's not until the share price makes a new high since entry that the trailing stop
loss would begin to move in your favor again. However, if you're using the ATR
method, there's another way for our trailing stop to move up. This would occur when
the volatility of a stock begins to decrease. If a share price were to begin to
move sideways, the ATR value would start to drop off. This would cause the trailing
stop to move up as the share price became less volatile.

The best way to understand these concepts is to print out a chart with the ATR
values along the bottom. Then on the chart, identify the point where you would have
received an entry signal, and mark your initial stop loss and your trailing stop
loss.

As the trend progresses make sure that you recalculate the value of your stop so
you can begin to get a feel for the way this method of using a stop loss works
Seeing how the changes in stock price affect you trailing stop loss will give you
the confidence to make them a key part of your trading system.
About The Author
David Jenyns is recognized as the leading expert when it

comes to designing profitable trading systems.

His most recent course Trading Secrets Revealed is a step-

by-step trading roadmap to having excellent money management.

Learn how *you* can become one of his students.

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This article was posted on March 01, 2006
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