In the earlier newsletters of this mini-series, we explored how to select stocks for swing trading. We also discussed how to participate in these stocks using OHLC, Renko, and Point & Figure charts. However, these steps only cover the initial phase of the trade. What comes next after entering a trade?

Once a trade is initiated, the goal is to remain in the position as long as possible, riding the trend until there is a clear signal indicating that the swing trend is nearing its end.

In this, and the coming newsletters, we explore the science of trailing the stop loss; the method to stay in the trade for as long as possible.

Why Trail the stop loss?

When entering a trade based on the various charting methods discussed in earlier newsletters, the initial stop loss is determined using a pattern-based approach specific to each chart type.

• For Renko charts, the initial stop loss is set at the low of the swing.

• For OHLC charts, it is placed at the low of the Most Significant Low (MSL).

• For Point & Figure (P&F) charts, the stop loss is set at the low of the column of 'O' in the DTB pattern.

These pattern-based stop losses serve as the initial protective levels. As the trade moves in your favor, it is essential to update the stop loss accordingly to lock in profits and manage risk.

The focus of this mini-series has been on establishing a rule-based system for trading. By participating in trades only when they meet specific criteria, we can effectively eliminate emotional decision-making. Just as rule-based entries are essential, having objective, rule-based exit strategies is equally important. This is where trend indicators become invaluable.

For swing trading, we employ three objective trailing stop-loss methods:

1. Using the Supertrend indicator

2. The 9-EMA rule

3. Utilizing the Moving Average line

Supertrend indicator: For the trend and the exit

The Supertrend indicator, developed by Oliver Seban, is a trend-following tool that integrates two key elements of technical analysis: Range and Average True Range (ATR). Another critical factor in its calculation is the Multiplier. This indicator is derived by adjusting the Range of the current candle, brick, or column using the formula ATR × Multiplier. For a detailed explanation, refer to my previous newsletter. The key takeaway is that the Supertrend indicator accounts for market volatility and adjusts its plots accordingly.

This indicator acts as a great trend filter.

• Price trading above the Supertrend is in a bullish trend

• Price trading below the Supertrend is in a bearish trend

In bullish trades, as the price moves in our favor, the Supertrend indicator rises alongside it. However, when the price begins to move sideways or starts to decline, the Supertrend flattens out. This behavior makes it an excellent tool for setting trailing stop-loss levels.

To incorporate this indicator in trading, set the initial stop loss as the pattern stop loss. Once the indicator moves in your favor and is above the pattern stop loss value, the Supertrend indicator value will become the stop loss exit price.

Let’s explore how this trailing stop-loss method can be applied to the same stock, MAZDOCK, using the three charting methods discussed earlier: OHLC, Renko, and PnF charts.

In the OHLC charts, the MSL is highlighted in the red box. The trade moved in favor, and the Supertrend indicator surpassed the initial pattern stop-loss level. As the price movement turned sideways, the Supertrend flattened out and triggered an exit.

In Renko charts, the initial swing breakout had its stop-loss set at the swing bottom, but this stop-loss was triggered. In the subsequent swing breakout, the trade moved in favor, and the Supertrend indicator eventually surpassed the initial stop-loss level. Notably, during periods of sideways or declining price movement, the Supertrend indicator first flattened out before signaling an exit. This highlights its effectiveness in adapting to market conditions and providing clear exit points.

In Point and Figure (PnF) charts, the Double Top Buy (DTB) is highlighted within the red box. The entry point for the trade would be at the DTB value. For both trades, the pattern stop-loss remained active initially, but the Supertrend indicator later exceeded this stop-loss level, effectively trailing the stoploss.

This newsletter explored the effectiveness of Supertrend as a tailing stop loss method. This objective indicator can not only be used for trend analysis but also for rule-based exit. In the subsequent newsletter, we will explore the other two methods on trailing the stoploss.

If you are new to trading, the TNT One membership could be a great starting point. It grants you access to all current and upcoming courses, providing valuable insights and practical strategies to enhance your trading journey.

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