12.17.2008

Nic`s stop - tighter by a day

In a Traders’ Camp in 2003 I met a trader by the name of Nic Grove. His story, with its colorful personal details, is in some way typical of how people come to trading. As a young man growing up in Australia, Nic was involved in his family’s real estate business, then went out on his own as a commercial landscaper. By the time he turned 50, he grew tired of the routine, and sold his business. He flew to Paris, rented a small apartment, and started learning French. Looking for something to do and generate income, Nic stumbled into trading. He happened to read my book, came to a camp, and gradually we became good friends.

During the bull market in 2004 Nic and I were buying stocks that had been temporarily driven down to their EMAs. We wanted to hold them for a rally back to their upper channel line, using a fairly tight stop. Nic suggested looking for the low where most people would place their stops and then examine the bars that bracketed that low on each side. He would then place his stop a little below the lower of those two bars. This concept is easier to illustrate than to describe in words. Please see Figures 5.7 through 5.12.

Figure 5.7 CVS daily

CVS is in an uptrend on the weekly chart (not shown). This daily chart shows that it was pulled down into its value zone between the two EMAs. The lowest low of the decline was $30.46, bracketed by two higher lows, $30.76 and $30.66. If we go long CVS, Nic’s stop would belong slightly below the lower of those two bracketing lows. Since the lowest of them was $30.66, I would put a stop at $30.64 or even $30.59—on the other side of a round number.

Figure 5.8 CVS daily follow-up

CVS hung around its value zone for a few more days before it took off and hit the target at the upper channel line. The stop below the second lowest low was never endangered.

Figure 5.9 Gold daily

Gold, while in a bull market on the weekly chart (not shown), got hit by a piece of bad news and driven down. It fell below its lower channel line, a deeply oversold area. The lowest point of the decline was $635.20, bracketed by two lows: $642.20 and $642. I would place a stop slightly below the lower of the two, avoiding the round numbers—$641.90 or $641.40.

Figure 5.10 Gold daily follow-up


Gold rallied to $659.80, into its value zone between the two EMAs and appears to have stalled. The stop was not hit, but now would be a good time to take profits—since gold is at value and does not seem to be going up.

Figure 5.11 Gold—2nd follow-up

Gold punched its lower channel line for the second time. The second decline was less powerful than the first, leading to a bullish divergence of the Force Index. At the right edge, gold looks like an attractive buy again. The lowest low of this decline was $637.70, bracketed by the lows of $648.80 and $645.00. I would put “Nic’s stop” slightly below the lower of the bracketing lows, at $644.40.


Figure 5.12 Gold—3rd follow-up

This chart shows that the rally continues. The stop held well, protecting the trade.

This very tight method of placing stops is especially suited for short-term swing trading. Trying to catch a bottom tends to be a dangerous business. A very tight stop like this one does not allow any time for dreaming. It tells the market to put up or shut up.

2 comments:

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Thanks
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