Top Trader_2. Advanced Stock Trading Strategies - The Trailing Stop

Lesson 2: Advanced Stock Trading Strategies - The
Trailing Stop

Most traders would probably agree with the proposition that the hardest thing to get
right in trading is the placement of stop losses and take profit levels. A great deal of
trading education and material that is shared with learning traders focuses on finding
the right places to enter trades. Let’s be clear that entry is very important, but good
trade management – i.e. using the right stop losses and take profit levels and
changing these levels appropriately as the trade progresses – is equally important.
The stop loss may be made dynamic, as a way to lock in profits on a trade that
progresses profitably. However, the stop losses should only ever be moved in the
direction of reducing losses or locking in profit. In this way, a trade that performs well
will end up giving some profit. This is also a good way to let a trade die a “natural”
death, instead of aiming for profit targets that can be very hard to predict.
One example of a dynamic stop loss is the trailing stop. This may be set at a
particular number of pips or based upon some measure of averaged volatility. The
latter option is the better choice.
Another example would be moving the stop loss level periodically so it is just beyond
major highs or lows or other technical indications. The beauty of this is that the trade
stays alive as long as it is going well. When a long trade starts to break down
through key support levels, then this type of stop is hit and ends the trade. This
method is a way of letting winners run, while cutting losers short.

In trading, one can make a profit by short selling.
A short, or short position, is a directional trading or investment strategy where the
investor sells shares of borrowed stock in the open market. The expectation of the
investor is that the price of the stock will decrease over time, at which point the he
will purchase the shares in the open market and return the shares to the broker
which he borrowed them from.
While getting into a short position is usually done with stocks, the same logic of the
trade applies to other types of assets such as stock options, exchange-traded funds
(ETFs), commodities and currencies. Short-selling puts the investor into a position of
unlimited risk and a capped reward. For example, if an investor enters into a short
position on a stock trading at $20, the most he can gain is $20 less fees, while the
most he can lose is infinite since the stock can technically increase in price forever.
Short-selling is one strategy to use if you believe the price of the underlying asset will
decrease in the future and you want to profit from that loss.

Let’s discuss the double tops and bottoms patterns. In this image we can see and
example of a double top pattern.

Double tops, or the M formation, and bottoms, or the W formation, are reversal
patterns. A double top signals the price is no longer rallying, and that lower prices
are potentially forthcoming. A double bottom indicates the price is no longer falling,
and the price is heading higher.
A double top forms when the price makes a high within an uptrend, and then pulls
back. On the next rally the price peaks near the prior high, and then falls below the
pullback low. It's called a double top because the price peaked in the same area
twice, unable to move above that resistance area.
The pattern is complete—traders may take short positions or exit long
positions—when the price drops below the pullback low. For example, if the price hits
a high of $50, pulls back to $47, rallies to $50.05, and then drops back below $47,
the pattern is complete and that could indicate that the price will continue to drop.

A double bottom forms when the price makes a low within a downtrend, and then
pulls back to the upside. On the next decline the price stalls near the prior low, then
rallies above the pullback high. It's called a double bottom because the price stalled
in the same area twice, unable to drop below that support area.
The pattern is complete, and traders may take long positions, when the price rallies
back above the pullback high. For example, if the price drops to $47, pulls back to
$50, drops to $46.75, then a rally back above $50 signals that the price will continue
to head higher.
Not all traders are interested in taking positions on a chart pattern breakout. Even so,
the double top or bottom pattern still alerts traders when they may wish to reconsider

their long or short positions. Another reversal pattern is the doji candlestick, which
forms when a security's open and close are virtually equal for the given time period.

A short squeeze is a situation in which a heavily shorted stock or commodity moves
sharply higher, forcing more short sellers to close out their short positions and adding
to the upward pressure on the stock. It implies that short sellers are being squeezed
out of their short positions, usually at a loss, and is generally triggered by a positive
development that suggests the stock may be embarking on a turnaround. Although
the turnaround in the stock’s fortunes may only prove to be temporary, few short
sellers can afford to risk runaway losses on their short positions and may prefer to
close them out even if it means taking a substantial loss.
A short squeeze is a big risk associated with short selling. If a stock starts to rise
rapidly, the trend may continue to escalate because the short sellers will likely want
out. For example, if a stock rises 15% in one day, those with short positions may be
forced to liquidate and cover their position by purchasing the stock. If enough short
sellers buy back the stock, the price is pushed even higher.

It is highly recommended using a stock screener for an in depth and updated
perspective on the market status. A stock screener is a tool that investors and
traders can use to filter stocks based on user-defined metrics. Stock screeners, such
as finviz.com, exist either for free to a subscription price on certain websites and
trading platforms. They allow users to select trading instruments that fit a particular
profile or set of criteria.
Some trading platforms and software allow users to screen using technical indicator
data. For example, one could filter for stocks that are trading above their 200-day
moving average.