If you know what trailing stop is, it means that you try to, as the price goes higher and higher and you are in a long trade, you are trying to use some methods to tell you when should you get out of a trade, okay? When does the trend start to turn around and you should get out of the trade?
So either you can use a trendline or you can use a moving average. So using moving average is one way that I could use for trailing stop as well. For example, if I notice that based on my longer term swing trading angle, okay?
The price tends for this particular stock, the price tends to bounce above these certain moving average parameter very often, okay? And whenever the price crosses below this certain moving average of this at the parameter, it always goes down very sharply thereafter, okay? So this is how I can use moving average to help me trail the stops. And help me to monitor, as long as the price continue to bounce off, or continue to go higher above, this moving average, then I can feel very comfortable about holding on to the profits.
However, if the price starts to break down below this moving average, which I notice on previous occasions, that whenever the price hits below, the price will start to fall very sharply or aggressively or trend down thereafter, then I might want to use this opportunity to get out of the trade when the price actually crosses below this moving average.
And again I want to emphasize, you cannot apply a single moving average parameter for all the charts in your watchlist. You’ve got to customize the moving average parameter on a chart by chart basis. Because every chart has got different characteristic, different behavior, some charts or some stops tend to trend nicely above a certain moving average parameter.
For example, 100 days moving average. For some stocks, the price might just keep crossing the hundred days moving average, up and down, up and down, up and down, and they might tend to follow the 200 days moving average better, okay? So that’s the reason why I said you have to look at each individual stock, study their characteristic, bring out the different moving average parameters, and see which one is a better fit for that particular chart that you’re looking at.
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