March 25, 2017: New comments S&P500
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To comply with rule number 7 for opening a long position, price must break a last possible downtrend line.
In the next figure we comply with rule 7 in the yellow buy long areas when a last possible downtrend line (red) is broken by a closing price.
Note also the red shaded areas for opening a short position with a last green uptrend line broken.
Rule 8: Stop loss Limits the Risk
Rule 8 is related to risk management to limit possible losses. Standard for trading stocks on a daily chart, the advice is to limit the loss to 10%. However, you must use some flexibility. You might go up to 15% for low priced high volatility stocks, while for lower volatility higher priced stocks and ETFs or indexes you should lower this limit eventually to 5%.
In the above figure there is a first yellow marked buying long signal, beginning of March. But closing price minus the stop below the last low is about 20%. This is too high a risk. So, you either set a buying limit order at a lower level at around 10%, which would capture the trade here, or you wait for the next opportunity, the second yellow mark where you would have to accept 15%.
For all the basic techniques, please consult my book “Capturing Profit with Technical Analysis”, published by MarketPlace Books and available HERE