Trailing Stops Explained | Swing Trading (Days to Weeks)
good afternoon everyone john mcnichol here and welcome to swing trading days to weeks our topic today is trailing stops we'll talk about three different ways amongst many that one can utilize trail and stop so stick around all right hey it's great to see those you that are live with us today uh such as sarah wayne ganesh we have alfred krishna kathy terry roy andy marcy george wayne amber and uh mr james boyd's helping out on the chat any questions i am unable to get to uh he'll be more than happy to help out do appreciate james being with us today you can follow us both on twitter uh you can see me on the screen at j mcnichol underscore tda and james can be followed with his first initial last name at jboid underscore tda it's a great way to learn more about your coaches and get some education along the way keep in mind the content is for educational information purposes only not investment advice or recommendation of any security or strategy or account type options not suitable for all investors straddles other multi-lake options strategies strategies often involve greater more complex risk than single-leg option trades and keep in mind you're encouraged to practice what you learn here today with tools such as paper money software which is for educational purposes and successful virtual trading during one time period does not guarantee successful investment of actual funds at a later time periods market conditions change continuously make note as far as with options whether long or short the risks associated with them position size is very important and risk management long positions the entire position can expire worthless as well as with short options there is the risk of assignment regardless of how little the option is in the money transaction costs important factors should be considered when evaluating any trade and while this webcast may discuss technical analysis other approaches include fundamental analysis may assert very different views and part of our uh topic here keep in mind a stop-loss order will not guarantee an execution at or near the activation price once activated they compete with other income and market orders there's a brief uh background for those you if you're not familiar with me or new to this webcast i do welcome you let us know if you are new to the webcast would love to give you a hearty welcome there the emphasis of this class uh once again uh is going to be more along the lines of swing trading uh relatively shorter term trades uh the idea is uh trading whether off of a support bounce target in a previous high or a new high based off of previous moves uh likewise uh with downward swings typically more in a downward trend or a break of support of a trend uh looking to target in a previous move to the downside now these similar entry techniques can certainly be used for a trend trade as uh we talk more on trend trades at least in my class on breakout and reversals which is tomorrow uh at uh 1 correction noon eastern time also james has a great class for technically speaking called trend trading weeks to months uh so the emphasis this class is a little more shorter term looking to capture on those uh quick bursts of momentum and uh do uh apologize uh in advance my voice will be somewhat subdued uh as i uh did uh lose my voice a little bit uh going into the weekend and earlier yesterday still recovering there uh so uh that does not mask my enthusia it does mask i should say my enthusiasm for being with you here today uh so hopefully you enjoy what you're learning here and uh let's bring up those agenda items as i mentioned from the top we'll define a trail and stop we're going to demonstrate how to place a trail and stop on the thinkorswim platform utilizing the default order for trail and stop and also utilizing conditional orders two examples that we've instructed and have utilized in the past and we'll time in today is utilizing an atr an indicator as a trail and stop as well as a parabolic sar to similar techniques here now if we go ahead and bring up the thinkorswim platform for those of you that joined us last week you know we did a a couple example trades and we'll actually use one of them as an example today as far as with trailing stops also like to point your attention over on the left there's my twitter handle and if you enjoy what you're learning here today consider clicking like and you'll also see in the lower right hand corner i believe of your screen a button to subscribe to trader talks it's a great way to keep track of not only what you're learning here today but be alerted for upcoming webcasts so i'm going to go ahead and go to the monitor tab uh two practice trades that we had done uh last week one was on cisco and the other one was on lrcx which was a spread we'll talk about lam research a little bit later if i look at this position we have actually two positions in this class we actually did a long 100 shares for a practice trade example uh on the bounce we talked about the k hold when price pulls back and trades above the high of the low day that may be an entry in the context of an uptrend or a sideways trend so we had entered on that uh those you had joined me the following session on breakdown reversals i actually utilized a buy stop uh to trigger an entry into a january call this order was placed on wednesday and it triggered today as we look at the chart you can see the setup for that as we bring up cisco one second here csco you can see the elements of both two of the common entry techniques uh for a trade uh as an example on cisco we were looking at a potential inverse head and shoulders as prices were transitioning from lower lows to higher lows forming those opposite shoulders on the 26 we looked at an example of a cold as price had closed above the high of the low day still making those higher lows now we were anticipating a potential break of that trend that's another common entry which i'd put in a a buy stop to trigger if the price had actually broken above uh this high range the high for the day seeing as that price on the bounce did trade up on some resistance and notice some indecision on those days and then kind of backed off a little bit i did a good till cancel on that breakout order and fortunately we were able to capture the momentum of the stock as it traded up through that resistance now we also talked about on the swing that as far as profit management some considerations is to adjust the stop when prices made about half of its move so focusing on the bounce trade of the 100 shares that we entered back here uh price it held price had broke target in essentially a previous high range this is also based off the size of the pattern as traders may look for a similar move now one way we can adjust the stop is you know just and this is the stock trade that's on here right now uh is on the chart i can actually left click and drag uh this stop one common technique is you know to adjust to a a break even uh in the case on the bounce trade that was somewhere around uh around this area here as the price had traded higher we can always double check that but that's one way of doing it now that's a manual adjustment and what some traders may do is uh adjust this stop manually one way of doing that is maybe utilizing an indicator i'll go to studies edit studies and i'll go ahead and add in atr average true range which is a common indicator i've taught about this for years and uh utilized it in the futures class as well which is taught on mondays uh here's atr now some common settings uh maybe looking at the last 14 days it kind of smooth it out some traders may want to focus the setting on a nearer term maybe like five periods here and we'll go ahead and click ok and apply and so you'll see the atr on the bottom part of the screen one way is to basically take a multiplier of this atr and for instance uh if we did one atr it would basically be that current value which would be 1.006 let's say i'll round it to a dollar dollar one okay uh if i want to do one and a half times you know that would be a buck fifty two times uh would be two dollars as far as the multiplier you know one of the considerations if you're looking at a a very short-term trade in the context of what we're doing here uh that multiplier may be one to maybe one and a half okay uh if one's doing a trend trade think more weeks to months uh kind of an intermediate uh trade i'll do i t for brevity there uh you know maybe looking at one and a half uh to two times and then if one's looking at it more longer term you know maybe the consideration may be looking at you know two to three times that atr okay just a few ways of looking at that now some of you were asking questions you know about the the chart you know if you like the style of of chart that i'm utilizing everyone has their uh techniques and different ways of visualizing things if you notice here on the scratch pad and i'll copy that and i'll place that into the field one i am using a lighter background uh so keep that in mind uh that's determined up at the top if you go to setup open or correction uh application settings and you can go under look and feel and if you have a dark background you can change it to light now i actually use dark and a lot of personal things but uh from a presentation standpoint uh you know and again it's a matter of uh uh you know i seem to get better feedback uh on the layer background but again that's personal choice uh but if you uh like that type of setting you can go ahead and take that field that seven digit character it is case sensitive go to setup in the upper right hand corner open shared item and go ahead and type in that field uh click preview and you should see a chart and then import you should see a chart that comes up similar like this all right and you can modify that however way you'd like by going into the gear and change settings for all the different colors make it your own all right all right so you know as far as with that atr now i manually adjusted to a break even but what if i wanted to change this to let's say a trail and stop i can go ahead and let's say right click on that stop order will do a cancel and replace now if i want i can go ahead and change which is currently a stop and notice that stop is at 55.83 so currently the way it is if the price goes at or below 55.83 it will trigger a market order and therefore compete against other income and market orders to go ahead and close out at the next available price which may be not necessarily near that price if things move fast or if there are gaps now if i go ahead and change this stop to a trail stop we'll do that now here you'll notice uh it still says market because it's still going to trigger a market order once that stop is triggered we still have time and force of gtc now here as far as the settings one can trail it by a dollar amount if i click on the drop down there is a bit of a scale now i haven't utilized this point method so i will defer on that another common way is doing a percentage so you know if i want to trail it you know by three percent if the price keeps going higher the stop will trail that price by three percent it'll never adjust down it'll only adjust up and there's a pullback of three percent it would close out that order if i did a dollar amount let's say take uh we'll change that percentage back to a dollar amount plus minus if i go ahead and put in 1.0
uh let's see 1.01 i believe that was basically the one atr value that i was looking at now i can leave it at that or i can cancel and replace and adjust that on a different basis there but this is also another way of setting that trailing stop now what will happen is if the price continues going higher that stop will follow about a dollar behind if the price retraces a dollar it'll stop it out if the price keeps going higher that stop will automatically adjust trailing by that dollar okay now let's just double check and i'll do it by default folks uh if i go right here right click on that existing stop so we can do that again i'm going to minimize this so we got a little more room we can focus on the price if i go ahead and right click on that order it allows me to got a few drawings here in the background that's what's causing a little bit of an issue here come on you can do it all right i'm gonna go ahead and remove one of these drawings here because it's uh giving me some fits here i don't know why it's not allowing me to do it come on there we go all right let's see if i can right click on this order again cancel and replace order all i did was type in a dollar one since it is a sell order on a bullish order it automatically defaulted notice i'm typing in a dollar one i hit enter notice it defaults to a negative number okay now if it was a bearish trade that would probably be a positive number okay so it says negative dollar one i'll hit confirm and send all right that went and canceled replace and now that's trailing that so let's go ahead and take a look make sure we're staying on track here so a trail and stop again is going to be an order that will follow the price whether by a dollar amount or a percentage amount as we've demonstrated and if the price keeps going higher that stop will trail it will never adjust down so if the price does pull back that percentage or dollar amount it'll go ahead and stop you out so we demonstrated the example of utilizing trail stop okay the stop will be dynamic and once it hits it will trigger a market order and sell at the next available price now some people ask well why not do a if i try to right click on this again cancel and replace well john why not use a trail stop limit okay well this is be the same instance on why the consideration is not typically doing a stop limit for a stop loss yes we can specify the most that we're willing to sell that stock at or in this case the least we're willing to sell that stock at uh it'll trigger the order uh but it will not fill unless this price is marketable and if the price keeps slipping then one is not going to be filled so keep that in mind okay we've utilized stop limits as an example to enter a trade where we can have some control over price and some price discovery but in the context of a trail and stop or a stop loss we've typically have used markets as an example because the idea is to close out the trade at the earliest possible time if the trade goes against you okay all right so we've talked about utilizing the trail and stop now i also did notice uh that came across uh on the chat for those that are live with us today uh there is a survey uh very important if you can take a moment to fill out that survey you don't have to fill it out now but if you can click on that link push it off to the side and fill it out at the end of the session as we're certainly not done yet hopefully you're enjoying the presentation and uh love to see that feedback there also for those of you that are listening to the archive session you can vote as well by just clicking like and obviously subscribe so by clicking like other people have an opportunity to see that and those of you that are here live with us too you can vote again after you fill out that survey by or before by clicking like as well and uh do appreciate once again james for helping us out on the chat there as we're discussing trailing stops now we'll talk about some other ways of doing these trailing stops utilizing the conditional order function on thinkorswim these are also dynamic ways of adjusting stops by utilizing indicators and there's a couple in there that we can utilize one being the atr trailing stop the other one being a parabolic sar so instead of let's say adjusting uh the trail and stop manually if circumstances change uh we can actually have something a little more dynamic that if the atr changes it will adjust on that position so let's see how we can do that well first off we want to start by applying that indicator on the chart itself so i'm going to go ahead and i've utilized the style function on thinkorswim by being able to quickly bring up the indicator in question atr trail and stop for you to add it you can add it on the same shared chart that is on the screen here let me go ahead and adjust my chart here a little bit to the side now if you go up to studies or just go to the flask that is your edit studies and over on the left-hand margin if we type in atr there's the atr indicator that we added before there are some other indicators here is the atr trail and stop now if you click on the question mark next to that it'll basically give you an explanation on what the indicator does and if you scroll down even more to more details it will launch the learning center on thinkorswim now sometimes for one reason it's not coming up on mine i don't know if i need to do an update but you can also google think or swim learning center atr trail and stop and it'll bring up that information as well now by double clicking on it that will add that indicator now i just double clicked and this was the default setting now the default setting was five period three and a half times now i just illustrated for you some examples of atr as far as multiple i went ahead and changed it to one and to do that if you if you're adding it on your own you just come over to the right to the gear the atr factor is showing 3.5 i'm going to change that to 1. now so for instance one atr today would be that 1.006 if the atr is different tomorrow it'll adjust for that the atr period is 5. now if you want to smooth it out some traders may make that a would go ahead and make that a uh a 14 period okay some people asked about the background um i'll double check uh well whatever background loaded up when i brought it up that should be the way it should come up if it was a darker background you need to change your background to a later background all right so we got the atr trail and stop added here i'll click apply and okay go back to that chart okay and then what you can do is you can go ahead and come up to if you want to save this as a style go ahead and go to style save style you can call it atr trailing stop but make sure you do click the check box where it says include patterns and study set and once you click save that will be part of your styles okay so we got the hr trail and stop now notice as you look at the atr trail and stop uh you'll see that it'll basically follow the price if the price is generally going up you'll see that atr follow underneath if the price is going down you may see that atr follow on top now this is a very important point to make here one those of you that have followed me in the sessions is you know can you put on a trail and stop when you enter the position just like as we've done initial orders with a hard stop you know let's say one percent below a low why can't we just put in a trail and stop right away well one theoretically can do that uh however uh keep in mind if one is utilizing an indicator that indicator may be different on the entry than it is once you're already in the trade as an example the indicator if you're in a bullish trade needs to be underneath the price if the indicator is already above the price when you enter the order and that may happen particularly on a bounce trade you would automatically be kicked out of the trade so as a matter of application not only technically but also just based off of uh patience is one of the ideas is not to institute a trail and stop until you've had a favorable move so notice in our example with cisco we instituted an example of a trail and stop once we hit kind of a benchmark maybe that was a previous high or halfway to the target for our example is basically given the trade an opportunity to breathe uh because notice if i had put in the trail and stop on the time that i had entered this order which was on this day notice that the price was actually below that indicator it would have automatically closed it out whereas once it started having a favorable move then you can see how that would start to trail okay and as we go forward this is where we're here right now okay so if i wanted to go ahead and institute a trail and stop based off of this indicator the atr trail and stop they want me to do is we'll go back to that initial trail and stop i have i'm going to right click on that uh still have an overlap here cancel and replace order and now instead of utilizing the default trail and stop we're going to do a conditional order and one of the ways of doing a conditional order is we'll make this a market gtc we still have the market component order in there now notice by instant we get an error it says market order must have daytime and force this is true unless you add a condition and by adding the condition we come over here to this gear now sometimes that way disappear uh but if it doesn't usually it looks like maybe it's it's up here now that's interesting um maybe it's because i have another order in but usually it may be hidden but if you move your cursor you'll see that gear appear i'm going to click on that box and bring this up and this is where we can go ahead and put in our condition so right now it says market gtc down here is where we can go ahead and put under market conditions now a lot of times in the case of options you know we've utilized the underlying stock price and put in a threshold of a dollar amount based with based off the stock price we want to get out of the trade but also there's a method here for study so i'm going to go down to study and click on that now once we go to study there's an edit function we're going to select edit that's going to go ahead and bring up a study condition a lot of cases it may already default to a moving average which some traders may utilize as an entry or an exit i'm going to delete this so we clear that out and it says no conditions are defined yet now we're going to come over here and select add condition i'm going to click on add condition and just think about what we're looking to accomplish for both the examples we'll be talking about is we are looking for the price to be below that trail and stop indicator whether it be in the atr or as we'll talk about the parabolic sar now below whether if the price goes below it or if the following period that indicator appears above the price indicating that therefore uh the momentum has changed and therefore exit the trade based off of those parameters so what we'll do to illustrate this is the first condition select condition we're going to focus on price so we'll click on price once we click on price we'll select close which is essentially the current price so we have the price selected we come over here to the middle and we're going to say is less than now this is very important i can say crosses below the indicator which is fine but if the indicator is above the price may not have necessarily crossed it so that's not necessarily a true statement the simplest true statement is if we're less than the indicator is to close out the trade and so what is our indicator is less than we go to the last condition and we'll select the study and we can start typing in the indicator we're utilizing and here it is atr trailing stop we'll click click on that now very important as well is what is our settings for that indicator well for illustrated purposes we're utilizing the five period here is the atr factor we're utilizing one for the example so one times that average true range and then we'll go ahead and we'll click save okay now we can go ahead and see what are we accomplishing if the close is less than the atr trailing stop by a factor of one it'll go ahead and trigger a market order so we're basically simulating a trail and stop based off of that particular indicator we'll click save confirm and send confirm and send is where you can also double check if cisco based off the study if the close is less than the trail and stop by a factor of one atr factor of one one times then it will close at the market so i'm going to go ahead and send that out okay and so now as we go and look at this chart right now based off of that indicator the stop is right here tomorrow more than likely that atr will adjust to below today's low in fact let me just double check sometimes it may be hiding on there but this would not update until after the close okay and if the price keeps going higher if the dot continues trailing we're still in the trade now once whether price hits one of the dots or if there's a candle reversal you may see the dot appear above as soon as the dot appears above and that could be very shortly after the opening of the next period then it would close out the trade at the market price okay so that's one way of doing that type of trade now as we've gone over these examples i want to make sure we understand that you know there's no perfect way when it comes to stops the idea the trail and stop as we've attempted to institute in this particular webcast is once there's a favorable move once one has given the price a chance to make that move what essentially you're doing is willing to risk some of those gains whether it is a percentage a dollar amount or for utilize the indicator one atr which is currently a dollar one or the next indicator we'll talk about parabolic which may be somewhat similar to see if the price goes higher now it's not saying that you have to use a trail and stops this is just an interest many students continue to ask about this this is why i teach it another objective is just having a hard target once it hits that target sell into that strength that's another objective however we can see that prices can go higher particularly in this market russell's broken to new highs so some traders may be willing to give back a little bit okay although that could be more keep in mind stops are not guaranteed to fill at a particular price so you're basically willing to give up something for potential greater gains so keep that in mind your results may vary with that and certainly encourage you to practice some of these techniques now if i go ahead and take a look at another example we're going to go ahead and bring up the charts again i'm going to go over to the studies well i'm going to go ahead and actually load it up since i already have a style but i'll show you how to do that we'll take a look at the parabolic sar now parabolic star stands for parabolic stop and reverse you'll notice as you look on it it's somewhat similar to what we saw with the atr however this one is a little more dynamic based off of its design the idea is that stop would be wider upon the initial entry or the initial reversal and then as the trend develops that trailing parabolic would actually get closer and closer to the price so that way when it reverses it's attempting to hopefully lock in a portion of those gains now again just like the atr trail and stop it can whip back and forth so keep in mind when it comes to setting the indicator is a consideration is we wait for a favorable move before instituting a trail and stop now clarifying the last question on atr that was not a dollar amount that was a factor amount if i go ahead to edit studies and add the atr for average true range and i'll change this to a five period the current stop that we put in there based off of a five period atr with a factor of one okay one being one times the atr currently the atr is a dollar 1.006
now notice yesterday it was 81 cents the day before that it was 83 cents so if the atr changes so will the trail and stop okay it's going to trail it by that one atr now if i go ahead and look at the parabolic sar so that's not a dollar amount it's a multiplier of what the current indicator is i'll go ahead and remove this so we got space for the parabolic sar now if you want to add the parabolic sar just go ahead and go to the gear or i'm sorry the beaker one more time the flask and start typing in parabolic sar if i click on the question mark parabolic sar stop in reverse looking at trending markets now this can be applied with different settings as well however i made this a little more sensitive to a swing trade now i went ahead and double clicked on that indicator to add that here are the default settings notice i had adjusted these to make these a bit tighter um based off of a swing trade and if you're making note of this and you're welcome to manipulate and practice with these how you'd like i used a setting of a 0.1 and 8.3 so if you add it on your own you can come over and click on the gear and let me just show you as far as a contrast so you can kind of see the why let's go to that beaker again i'm going to remove the original setting we'll bring up parabolic sar with the default settings and i'll click apply now notice here this is a bit smoother now if one's in a trend trade this may be more adaptable to a trend trade not necessarily as much for a swing so to adjust it for a swing we had to kind of tighten those parameters a bit and so to do that again we go to that beaker for the edit indicators i click on the gear for that and again the settings that i did was a 0.1 and a 0.3
one was the acceleration factor so i basically accelerated it faster but i adjusted the limit up a little bit as well not saying it's perfect but one can go ahead and take a look to see on how that may apply to different swings i'll click ok and apply and then notice how this is more adjusted to the case of swings versus necessarily an overall trend kind of more days to weeks now notice the parabolic sar is a little more dynamic as whereas the atr trailing stop seems to not update until after the close of the current period the atr trail and stop will appear on the current period and if the price was a drop below that it would go ahead and stop it out or if there was a pullback on a succeeding day and the parabolic sar appeared above then that would be a trigger to get out of the trade and again if i want to do it like that i can right click on the existing order cancel and replace order we'll go into that gear we'll leave that market gtc clicking on the gear now i already had the parabol the atr trail and stop in there but if you were starting this from scratch again you'd select study edit whatever indicator is there you delete it start off with a clean slate we'll select add condition and again very similar setup we'll do study a correction price may have to back out of that hit cancel add condition we'll select price close is less than and we'll come up to the indicator and select study and select parabolic star now again similar to the atr trailing stop although this one is a little more dynamic dynamic's not necessarily better some traders may want to take that pause after each session and re-evaluate but here i went ahead and changed it to the settings based off of similar to a swing acceleration factor 0.1 acceleration limit of 0.3 again i'll click save we can double check it right here closes less than the parabolic sar with those factors click ok and then we'll click save now once again do confirm and send we can go ahead and double check and take a look uh now unfortunately some of the parameters do run off you may need to slide it over a little bit so you can see everything so if the close is less than the parabolic sar with the factor of 0.1 acceleration limit of 0.3 is true so i click send and so now the way we're going to finish off with this trail and stop is based off the parabolic sar uh we've made a favorable move halfway to the target right now the parabolic sars here a little bit below the break even probably but more than likely this will adjust higher the next day or if the price reverses it would go ahead and sell if that dot appears above the price all right let's go and double check and uh see what we've accomplished here today and address some of the questions concerns we talked about what a trailing stop is we showed how to institute a trail and stop based off of a dollar amount or a percentage manually we've also utilized the strength of the thinkorswim platform by utilizing conditional orders tied to indicators that have trail and stop properties such as the atr trailing stop and the parabolic both of these would adjust period to period uh some may be a little more dynamic for the swing trade okay now looking at some of your questions there uh i'll take the how can one back test the strategy well you can go ahead and apply that indicator to the chart and go ahead and take a look at previous swing trades that one may have taken two you could forward test by practicing those trades and we've done some of those in this class as well if there's a gap overnight well you know whether if you have a trailing stop or a hard stop or a mental stop gaps or gaps they can occur and more than likely uh if that gap occurs uh that would result in a reversal and potentially a stop now what some traders may do is and there's obviously risk to that is cancel the stop at the opening uh to see if the gap fills in and if the gap fills in to look for a better exit however can a gap continue going lower as well as a gap can continue going higher okay there's pros and cons on doing that okay uh also i saw a few questions about uh kaholt's what a cohold is you know hold is close above high of the low day and that would probably be a great uh example to promote a couple of things one on the education tab is considering and this is for a lot of you that are probably possibly new to technical analysis or new to how we may teach it is under education uh under in-person events we do i believe have a technical analysis virtual workshop going on right now this is a live only event i believe uh is it cameron cameron may is teaching that uh talked about trends yesterday probably talking about support and resistance today and we'll be talking about the holds over the course of these sessions here so live only you can go ahead and register for those two is if you go ahead and take a look at some of the previous webcasts and i'll put it at the end of this session as well if you go to webcasts and in the archive webcast you can see previous sessions and if you look for yours truly now i know james teaches this as well so you can follow hibs but if you go back and take a look at just last week's session using candles for possible entries and exits i talked about the hold and the kablood so that was just last week you can view this at any time in fact i'll go ahead for you those of you that are live i will go ahead and paste this in so you can bookmark it and for those of you that listen to the archive session again at the end uh you'll see it on the playlist and the individual webcasts there all right hey folks uh fill out the survey uh we'll have james send that through one more time and consider clicking like for this webcast as well as we went over a trail and stop and we demonstrate how to place a trail and stop on one of our existing positions as well as utilizing conditional orders once one has a favorable move into trade now remember everything we discussed today was for educational purposes and not a recommendation to buy or sell any security any investment decision you make in your self-directed account is solely your responsibility so uh please go and fill out that survey uh james if you go and push that through one more time do appreciate it and likewise folks have a wonderful day bye now you
2021-11-04 18:42
