Trading Basics: Evolution of a Trader

TRENDLINE STOP

A trendline stop is like a moving average stop without the work of calculating a moving average. When price advances to a new high, place a stop slightly below the prior minor low and below the trendline. Raise the stop as price climbs and new minor lows appear.

Figure 3.2 shows an example of how a trendline stop works. The inset shows the ideal case of price moving up following a trendline higher. Price peaks at C, drops to E, and then bounces off the trendline on its way to D. When price approaches D, which is near C's price level, place a stop a few cents below the trendline at minor low E. That is almost all there is to trendline stops.

After taking a licking on MBI, Mary switches to Crane, shown in the figure. She sees the head-and-shoulders bottom with a left shoulder (LS), head, and right shoulder (A) form, but does not take action until price closes above the neckline.

The neckline is a line drawn connecting the two armpits of the head-and-shoulders (O and P), but, in this case, the neckline slopes upward so she just uses the high of the right armpit as the buy price (shown by horizontal line Q). When price gaps open, she buys and receives a fill at the opening price of 25.15. She places her first stop below the prior minor low, at B, at 22.91 (below round number 23.00).

She draws trendline AB and extends it into the future. When price approaches F, she raises her stop to below the trendline at G. When price climbs to I, she raises her stop below the trendline, ...