Trendlines as a Trailing Stop

TRENDLINE BREAKS

Using trendlines is an elementary, but effective method for letting winners run. The exit on a trade can be as simple as a break of a trendline or another alternative as I'll explain in a moment.

Because of their natural slope or angle during an upward trend, they can make excellent trailing stops, automatically adjusting to increasing volatility which can often exit you out of a move near the top. This prior statement is of course dependent on whether or not price gives new points of resistance from which to increase the angle of the line.

As previously mentioned, drawing trendlines can be very subjective and traders will draw them differently on the same chart. Simply use the retracements and natural 1-2-3 flow of price as I explained before, to draw a trendline.

When using them for exits, you of course must be in front of your screen to draw and adjust them, unlike profit targets which do not requite periodic maintenance.

After getting two points to draw a trendline from, you simply keep adjusting or 'trailing' your stop below the trendline.

Using a trading platform like NinjaTrader's ChartTrader makes this a convenient and visually easy task to keep up with.

HOW TO USE THEM AS TRAILING STOP

When using trendlines as a trailing stop, price must do two things to exit you from a trade:

Break the trend line AND break the low of the previous bar One of these occurring is not enough to stop you out of the trade. Sometime a slight break of the trend line without a break of the low of the previous bar, will require you to slightly adjust the angle of the trend line.

The chart below shows an example of a breakout entry, a trendline drawn to let profits run and the break of the trendline which results in an exit from the trade. Note that when using trendlines for a trailing stop, like many other types of exits, you will always be giving up some amount of profit.

This exit method will never get you out at the high of the move. But that's OK! You don't have to get the entire move to make good money, just take a nice slice of it.

Trendlines on stock chart of GPC


Here's another example of a trend line maximizing the profits of a potential trade. Don't just be satisfied with tiny profits. Don't be tempted to hit that sell button too soon! They're not all going to work out like this one, but you don't need many of these to wipe out all those small losers you're going have. Let'em run!



Chart of DV displaying exit using break of trendline