Validea is an advisory service which assesses stocks based on the investing criteria of many of the ...
Taking Quick Profits Versus Boxing in Profits: “Bread and Butter” or “Bread Crumbs?” (Part 4)
11/13/2008 12:01 am EST
As my entry bar closed, I noted it was a wide range bar that closed on its highs, and at this point, from where I entered my long position to the close of the entry bar at 1.4341, I had a potential profit of 181 pips! I certainly couldn’t let this much profit turn into a loss. I could move my initial stop loss order to break even, but I didn’t want to leave 181 potential points of profit on the table unprotected either. When I am long, I generally place my stop profit orders underneath market structure, because there are generally limit buy entry orders sitting at these structures that will act as some protection for my stop profit orders. But there was no conventional market structure for me to hide my stop profits below this time—the recent sharp sell off had destroyed all semblances of structure, other than the bottoming formation that was still intact.After a bit of thinking, I decided to put a stop profit order ten pips below the tops of the pair of bars with nearly the same highs the current bar had just run above. I cancelled my initial stop loss order at 1.4092 and entered a stop profit at 1.4259, locking in roughly 100 pips should price turn on a dime and sell right back off.
The next three bars were also higher and each had a higher close. There was still no obvious market structure for me to hide any stop profit orders beneath, but with price closing at 1.4472, I now had a healthy potential 312 pips of profit in the position. I had no choice but to be creative—I placed my stop profit order 25 pips below the low of the bar that had zoomed above the Median Line, at 1.4367.
In reality, these are nothing more than “cash profit stops” because they are not using any widely used market structure as protection. I never use cash stop loss orders, but I now had so much profit in this position that I had to keep “boxing in” profits, using what amounted to a cash profit stop. To me, using cash profit stop orders is quite different from using cash stop loss orders, though I seldom ever use cash stop profit orders. It’s very unusual for me to find myself with a position and no structure to hide my stop orders above or below, but the market is always right! I was here with a great deal of profit in my open position and I had to protect it.
Note that I ran my cursor along the upper Median Line parallel and found that because of the upward slope of the line, my profit order should now move higher, to 1.4648. I am trading with the trend because I am long against up sloping lines, so I get paid more the longer I hold this position as long as I move my orders higher.
Three more bars unfold, and again, all three closes have higher highs and close higher. There is still no discernable market structure (this is what I refer to as a “chimney formation”), though it’s not yet clear if it is just the opposite side of the downward chimney formation from the prior highs. I am on the right side of the market, and at the close of the last bar on this chart at 1.4600, I have a potential profit of 440 pips.
More in Part 5 tomorrow…
I wish you all good trading!
Related Articles on STRATEGIES
The Roman philosopher Seneca wasn’t talking about the stock market when he wrote that “T...
The Dow Theory was originally referred to as “Dow’s Theory,” since it was based on...
When stocks are selling at valuation extremes and consumer optimism is at one of the highest levels ...