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As I have said in the past, I do not recommend using a stop at the actual high or low, but instead suggest using a level that is half of one percentage point, or 0.005%, above or below the monthly range. In these examples, the actual low will be put in parentheses.

One of the stock market’s best trending periods in the past 15 years was from late 1994 through the middle of 1998. This chart of the Spyder Trust (SPY) covers this period.

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In December 1994, SPY formed a doji (a sign of indecision), and in January 1995, SPY closed above the prior month’s high and the OBV turned positive. The ETF closed the month at $46.84, and longs would have been established on the February opening at $46.91.

For the month of February, the stop would have been at $45.23 ($45.45 was January’s low). SPY closed higher in February, and so for March, the stop was at $46.53 ($46.76 was February’s low). For the purposes of this discussion, I will consider the position stopped out, as the low during the first week of March was $46.53.

The monthly OBV was positive, so new longs would be established on a move above the prior month’s high. SPY opened April 1995 at $49.83, so new longs should have been established at that time.

SPY did not make a new monthly low until January 1996, when the December stop at $59.95 ($60.26 was December’s high) was broken when January’s low was $59.33. This would have amounted to a 20% gain in eight months.

In February 1996, the January high of $63.36 was exceeded, and for the next five months, SPY edged higher. In July 1996 (point 3), the June stop at $65.48 was hit (June’s low was $65.81) when SPY had a low that month of $60.06.

Just two months later, in September 1996, new longs would have been established when SPY moved above the prior month’s high of $67. This position would not have been stopped out until March 1997 (point 3) when the stop at $76.73 ($77.12 was March high) would have been hit once SPY dropped as low as $75.25.

The monthly OBV was still confirming the price action and was above its weighted moving average (WMA), so when SPY moved above the April high at $80.69 in May, it was a signal to go long. The stop should have been at $72.94 (April low was $73.31). This would have been a risk of 9.2%.

This long position was held until October 1997 (point 4) when the September stop at $89.80 ($90.25) was triggered. On this correction, the OBV dropped sharply but did hold above the rising weighted moving average.

Two months later, in December 1997, the November high at $99 was exceeded. This signal was reversed in January 1998 (point 5) when the December stop at $91.90 ($92.37) was hit.

SPY opened February 1998 at $99.91, which was above the January high. On these new longs, a stop at $90.46 (0.005% under the January lows at $90.91) would have been used.

This position would have been held until August 1998, point 6, when SPY dropped below the July stop at $110.75 ($111.31). A new buy signal was generated in October 1998 at $107 (not shown) and was not stopped out until May 1999. SPY closed the year at $123.31.

Over the three-year period, these eight trades would have netted almost 70% of the potential gain if one simply bought on the opening in 1995 and sold on the last day of 1998. There were eight trades and 75% of them were profitable.

Let’s now examine how this translates to other markets. Most think of the forex market as being particularly volatile, and a high percentage of forex traders fail. One common complaint is that many have difficulty placing their stops.

NEXT: Using Monthly Highs and Lows to Trade Forex