Article: Stop Loss Indicator

After reading the article on forward-shifted moving averages, I tried to see if single moving averages could effectively be used to stop losses. The advantage to a forward-shifted moving average, averaged over a small number of bars and used directly as a stop-loss indicator, is that it clings close to your bar plot, yet it moves up and down with the bars, helping to prevent you from getting kicked out unnecessarily.

This is one possibility I have been toying with: Gann makes a point that plotting the close doesn't do you much good because it is the high or low that gets you stopped out. Therefore, as a stop-loss or entry method, use high and low n-bar moving averages shifted forward m bars. n can be 1 and it works pretty well. I find n=3 and m=3 to be good numbers for the S&P e-mini chart with 5-minute bars, during up or down moves. Ensign software makes charting easy. You color the moving average of highs shifted forward green. You color the moving average of lows shifted forward red.

Now, for employing these averages as stops, use candlesticks with the simple trend indicator so they will be colored red and green. When a green hollow candle passes or is cut by the green moving average line go long. Don't if the candle is green filled or if just the wick of the candle is touching the green line. When a red filled candle passes or is cut by the red moving average line go short. Don't if the candle is hollow red or if just the wick of the candle is touching the red line. Do nothing if a red candle crosses the green line or a green candle crosses the red line.

This system works fine for trends but whipsaws you out of your money during horizontal moves. Nevertheless, this system can at least help you see when you are in a horizontal move. An up or down trend is characterized by the space between the red and green lines being largely empty. A horizontal move is usually characterized by the space between the red and green lines having bars. Or the space above the green line and below the red line can also have bars, particularly when the chart has narrow bar ranges and multiple gaps due to low volume.

One of the nice things about this method is that the two averages can be plotted with Ensign Windows without any special ESPL program. You use simple moving averages. You set your first average to use a High data point, and make the color of the first moving average green. Make the parameter for the 2nd line a 1 so the second line for this object is not plotted.

Then you add a second moving average object, setting it to use the Low data point. Set the first moving average color red and the 2nd line parameter a 1. This gives you a green moving average of highs and a red moving average of lows, both shifted forward the amount you choose.

If down moves for your market are characterized by a high degree of oscillation and up moves are typically smoother, you can set the parameters for the green and red lines differently. You can accommodate the differences in the way the chart moves up and down so you don't get thrown out of a move prematurely. Another refinement would be to use offsets to shift the green moving average line up and the red line down, but I haven't found any need for this yet.

Hope this is helpful to someone.

Article by Jerry Cohen