Stop losses should generally be obeyed. In theory it works logically like this – the stop loss is triggered then over the next session the position is closed. In borderline cases where a trend is fairly stable, I sometimes use trader discretion and stay in the trade.
Checking a carton of eggs for any broken ones before leaving the supermarket takes only seconds. Some people do it and some don’t. I definitely do, picking every egg up carefully for inspection. A recent trade required the same level of monitoring each and every day, in case the trade was about to crack and fall apart.
Alligator Energy Ltd – AGE was a stock found on a routine scan of daily charts. Focusing on the right-hand side of the chart, a recent sell down by traders saw price touch the lower edge of the long-term GMMA without falling through it.
Resistance at 0.057
Traders pushed price back up towards the resistance at 0.057. The short-term GMMA had started to expand out and upwards. A small breakout was emerging against a background of strong support by investors as indicated by the widely separated moving averages.
Position Opened
This analysis was made the night before. The next day price broke though the resistance level of 0.057 and an entry was made at 0.06 with an initial ATR stop loss at 0.051 and a profit target of 0.072.
Failed Breakout
Not every breakout continues and this was one of them. After price broke through 0.057, it turned back down away from the entry and closed below the 0.057 level again. The lines of the short-term GMMA compressed and changed direction downwards. Traders sold the stock down to the lower edge of the long-term GMMA once more as marked by the purple arrow.
Stop Loss Triggered
Price triggered the trailing ATR stop loss line at 0.0525, closing just below. A trigger of the ATR stop loss usually signals the potential for a trend change in the future. In the case of a borderline close around the ATR line I monitor the next session’s open for signs of price recovery. If price moves back up then the trade remains open.
The next day price traded above the 0.0525, closing above it again. In this situation where price was back over the ATR line, I used trader discretion to keep the position open on the condition of carefully watching price over the next few days.
GMMA Trend Order Continues
Price recovered from the one day close below the ATR stop loss level of 0.0525. The short-term group bounced off the lower edge of the long-term GMMA as traders showed interest once again with buying pushing prices up from the area of the purple arrow.
Recalculating the Stop Loss
Remaining in the trade required another stop loss. A new stop loss of 0.049 was recalculated from the triggered candle marked by the purple arrow. An alternative method was used – the Count Back Line CBL stop loss. The CBL stop loss indicator tends to follow price closer than a recalculated ATR. Resetting the ATR line indicator is equally valid for setting a new stop loss.
Resistance at 0.068
Price made a third attempt to break resistance at 0.068. Eventually price did, closing above 0.068. This was followed by a nice big gap up where price passed my target profit price of 0.072. The profit target was achieved as marked by the orange star and the trade position was closed at 0.08 for a 33% profit.
Like every egg in a carton, every trading day in the AGE position needed to be checked carefully in case of any cracks alerting us to take appropriate action. The trend in this stock didn’t end with the trigger of the ATR stop loss. Keeping the position open with a switch from ATR to the CBL stop loss helped monitor the trade more closely and with the resumption of the uptrend, the trade was completed.