Chart of the Day: Moving Stops with Confirmation

Too many times, when people talk about “trading patterns” they are focusing on entry patterns. Yes, it is important to have patterns that show a positive expectancy, but the decisions made after trade entry, what we call trade management, probably contribute more to profitability than entry location. Some of the most important questions concern stop location. (Stop, in this sense, does not refer to an order actually placed in the market. It can simply be a price level at which you decide it is time to exit all or part of the trade.)

I entered a long position in the USDJPY (short Yen) quite some time ago against a stop around 81.00, looking for a quick upside breakout. When the upside breakout did not develop, it became apparent that the market was holding a broad consolidation pattern, and that there was the possibility of a complex consolidation, so I did not tighten the stop significantly. However (and this is the key) yesterday’s action was a sharp upside breakout above previous resistance. Now the stop can be tightened significantly. Extremely aggressive traders will want to put it somewhere in yesterday’s range, while a more conservative approach sees it a bit under yesterday’s low. In all cases, the operative idea is that this breakout should continue higher with minimal back and fill. No sense taking a large loss on a trade once it starts working like this—tighten that stop and devote your precious mental capital to other issues.



Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has One Comment

  1. João Oliveira

    if your stop was hit would you consider going long the yen? are breakout failures statistically tradeable according to your research? thkxs

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