Mole is alluding to some of his trend trading strategies, which I am hoping he will share.
I thought I’d do a post on an alternate method of trailing a stop during a short squeeze, or a runaway move. This is a standard trend following method, its stolen verbatim, and I use it whenever I can. One big move traded properly can make my whole year, and as I am a very agressive trader I tend to pyramid up, taking additional positions when price confirms my position.
First you need to know what a Spike Low, sometimes called a Swing Low, is. Swing low is a low with a HIGHER LOW either side of it.
This is not a swing low because it hasnt got ANY candle on the right side of it
Price action driven by short squeezes has a particular look. It looks like its about to top any minute, it makes it emotionally difficult to buy the high. It entices top pickers with very plausible looking reversal setups on lower timeframes, which fail, continuously.
Look at the $spx for the last few months. Its been going up, but the daily ranges overlap, a lot. That means that any given day someone got long, he is likely to be underwater (in loss) at some point the next day.
Take a look at the price action for the Euro unwinding of 09, see how during the sections which were down for multiple days in a row, it wasnt all one way traffic. In fact each day OVERLAPS quite a bit with the previous day.
This is the key to this type of price action, its what drives it.
Obviously a different type of trailing stop is neccessary. I’m convinced this is the optimal method for trailing a stop in extended moves.
Ordinarily I am in a big hurry to get my stop to breakeven, to guarantee I dont lose money. Thats a BIG MISTAKE in this type of price action. I accept the risk to the stop loss at the start, and I dont move my stop up UNTIL a new spike low (swing low) is formed, at which point I move the stop up. I have to wait until the day after its formed, because as demonstrated above, a spike low has a lower low on BOTH sides of it, and the current candle CANNOT be a new swing low.
I have an additional rule that I exit on the second consecutive close outside the bollinger band, but thats non-standard.
Take a look how this would have worked trading the recent blow off top in silver.
This recent move in $spx is all fresh in your minds. Be honest, if you were long, could you have held tight for the whole move? Emotionally its almost impossible, even with the best of intentions. If you plan on riding out the massive moves, it makes it MUCH easier to adopt a mechanical strategy like this.
The downside is that you have to accept stop losses which can be a LONG way away from current price.