About Stops

[Trader Question]

please pass this stop placement consideration on to Charlie

About stops.

If you consider the premise upon which I communicated this past summer 2007 about pivot points and stops, this same premise could be somehow be to P&L so I will try to share what I know in order for you to perhaps be the one who adapts it.

Consider a weekly traditional price bar chart with nothing on it, but bare price bars. Now let's assume by conventional technical analysis that this weekly chart is in a defined uptrend. How do we know that? By definition, just like P&L. Correct?

So what defines an uptrend in conventional technical analysis OR what defines an uptrend in P&L? Hope you see where I'm going.

In conventional technical analysis an uptrend is defined as having at least 2 higher pivot lows and higher pivot highs. In your book "How to ..." you wrote about isolated lows and isolated highs. Just to be perfectly clear, ALL isolated lows (ISL) and isolated highs (ISH) are indeed pivot points. But all pivot points are not isolated highs or lows because a pivot point may (and often) takes more than 3 price bars to complete. Completion of the pivot point and/or isolated high/low is defined as:

For a Isolated high we must see a 3 price bar pattern (I'm sure I don't need to write this as you have written about it yourself but I will be complete) where the center bar's high is higher than the bar before and higher than the bar which follows the center bar. Also the close of the last bar following the center bar must close lower.

For an Isolated Low: we must see a 3 price bar pattern where the center bar's low is lower than the low of the bar preceding and the bar following the center bar. Here the last bar must close higher than the center price bar.

The only difference to include a more general category called Pivot Points is that the "center bar" may take many more bars than just one single bar in order to complete the higher close following the "center" bar.

The premise/theory/principle here is that IF we have a defined uptrend then we must have at least 2 higher pivot lows and higher pivot highs. If price should break below this uptrend line then our premise for entering MAY be incorrect. I use the word MAY because price is still considered to be in an uptrend until it has reversed. How do we know price has reversed? The previous pivot point/ISL for an uptrend is considered to be the last valid price level of support, thus this is the reason why we drew the trendline to begin with as the trendline connects the pivot lows together which act as support to define the uptrend.

For a true reversal we must see not only a break of the uptrend line, but ALSO 2 lower pivot highs/ISH's and 2 lower pivot lows/or ISL's. These lower highs and lower lows must be present in order to draw a new trendline which is a DOWNTREND line which would therefore mean that we are no longer in an uptrend.

The risk in trading as far as stops go is ALWAYS to the previous pivot low for an uptrend OR the previous pivot high for a downtrend. The assumption of this rule is that price is ACTUALLY trending, i.e. the rule is different for congestion as described below.

For Congestion Trading in conventional analysis, we still must use the pivot highs and pivot lows for stop placement. However because price is not trending, i.e. price is in congestion, then this means that the pivot highs/ISH's if you will AND pivot lows/ISL's are not trending or perhaps better said they are variable with some ISH's higher while others are lower and the ISL's are moving too where some ISL's are lower and some are higher. In other words price is fluctuating and we cannot see 2 higher ISL's which are necessary to define an uptrend. In P&L terms this means that the dotted line and the block level may hold horizontally to create a rectangular range or the dotted lines and blocks may expand and be variable. This variable pattern is comparable to Broadening patterns for expansion and Triangles for contraction in conventional analysis.

So my thoughts are how can this be applied to P&L? Well, I believe that these same principles must be adapted to P&L's definition of Trend Run or Congestion Trading. This is why I will often use the pldot or ET/EB area for stop placement or at least an area to consider for stops in a TRENDING market only and I will check the areas of Block and Dotted Line levels for Congestion Action trading in order to place stops. I believe many traders do not consider the type of trading that they are in so they will place their stops incorrectly and get stopped out. They simply have defined where their trade in NO LONGER VALID because they do not know what type of trading they are involved in. I have seen this consistently with P&L'ers and conventional technical traders.

So go to it if any of this makes sense to you. The principle of using pivot points/ISH's, ISL's is sound and I think adaptable to P&L as I have done so myself, but perhaps you have a specific way that you might use these principles for P&L. However, I truly believe that stops must be altered according to the type of trading that one is currently involved.

Bottom line is that once one understands what an ISL or ISH is, AND is able to determine if price is Trending or in Congestion, then it is so very simple just to look back a few bars to SEE where the last ISL or ISH exists. It is critcal though to know if you are Trending or Congesting.

As one more additional point. When trading exhausts that are assumed to be the end of an UP trend run, then this is the time to be aggressive and not wait for 2 lower ISH's to form in order to know that we are now moving into a defined downtrend OR for 2 higher ISL's to form in order to know that price is now in a defined uprend.

Maybe my words won't make sense but I hope the theory does.

M.S.

[pldot]

HI Charlie, passing along to you as requested...

Charlie's response... f.y.i...
,,, have printed out and at least will try.
,, have a total mental emotional pyscho block on the issue of stops and know not why,,, except ! (sic),,,->
,, re: "P&L's Association with Awareness",,, (written 1996),,, the key is the inability to recognize something new, an issue very human in that does not wish to do so, said mind connected only in old ways.
,, key to survival is the ability to accept the 'abstract' as well as the 'condition of addiction' (mental),,, ( just a warm up for the paper to be written: "Survival Kit".)
,, now for another cup coffee, for new brain-cell search, new paradigms.