Setting Protective Stops -  A Guide for Elliott Wave Plus Subscribers

Notebook: LR Thomas
Created: 14.03.2020 11:20 Updated: 14.03.2020 11:25
URL: https://elliottwaveplus.com/setting-protective-stops/

SETTING PROTECTIVE STOPS –  A

GUIDE FOR ELLIOTT WAVE PLUS
SUBSCRIBERS
SPECIFIC PROTECTIVE STOP LEVELS AND STOP
TYPES (FIXED AND/OR TRAILING) ARE
ABSOLUTELY REQUIRED AND INTEGRAL TO MY
AMA/MOMENTUM ALGO TRADING SYSTEM.
Each AMA/Momentum Algo Screenshot inside each Premium Plan or
Crypto Plan Nightly Report includes an on-screen informational box that
shows 3-year backtest results.  Included in every one of these boxes is a
suggested initial fixed stop (in dollars), as well as, on some items a
suggested trailing stop (in dollars).  This document is intended to spell out
exactly how to determine the exact price at which protective stops orders
within our system should be placed.  As always, if you are a current
subscriber, and have any questions about how to utilize stops within my
AMA/Momentum Algo system, please feel free to email me at
Sid@ElliottWavePlus.com

My platform, Trade Navigator does not show the suggested initial stop level
on screen until the auto-entry trade is executed, which occurs at the
opening price of the daily candle following the signal candle.  Once the
trade is active, Trade Navigator does show the initial stop on screen, but
subscribers first see that level in the Nightly Algo Screenshots the evening
after the entry candle is closed.  This is one of the reasons why I place an
informational stat box (mentioned above) on each AMA-Algo item
screenshot.  The information in that box includes the dollar value size of the
initial fixed stop, and whether the algo suggests, based on back-testing and
optimization, changing to a trailing stop at some point during the trade,
and if so, the size of that trailing stop.

FUTURES CONTRACT EXAMPLE:

If the item being traded is a futures contract, the system stats are based on
trading one contract at a time.  Let’s use the ES contract as an example. 
When a new buy signal candle is initially designated, the algo is suggesting
going long one ES contract at the opening price of the following candle.  As
of this writing, based on 3-year back-testing and optimization, the
suggested initial stop for the ES contract is $1200 fixed, and no eventual
change to a trailing stop is suggested.  The size of the initial stop can still
be ciphered very easily.  When trading one contract, each ES point is worth
$50.  So $1200 divided by $50 is 24 points.  The algo therefore suggests
placing a protective stop 24 points away from the opening price of the
entry candle.  In this example, if the opening price of the entry candle is
2800, the algo suggests utilizing a fixed stop placed 24 ES points below
that, at 2776.

Example of a typical futures contract entry and exit, when a fixed stop is
utilized:

ETF EXAMPLE, INCLUDING HOW THE TRAILING

STOP WORKS:
If the traded item is an ETF, which trades like a stock, there’s no direct way
to short the item like there is in futures contracts, so we use leveraged (3X)
bullish and bearish ETFs to allow for going long or short the item.  For
example, if you want to go long GDX, our nightly algo reports/signals show
buying shares of NUGT.  If you want to short GDX, our signals suggest
buying shares of DUST.  All back-testing results stats on ETF’s shown in the
informational on-screen boxes are based on each trade being $10,000
worth of shares.  Stops are also figured in dollar amounts, and are
proportional to a $10K initial purchase.

Let’s say that a new buy signal has appeared in the nightly algo report on
NUGT, the 3X bullish large cap Gold Miners ETF.  When the buy signal
candle appears, the algo is suggesting buying $10,000 worth of NUGT
shares at the open of the next daily candle.  Let’s say that the entry candle
opens at $20 per share.  You therefore buy 500 shares, or $10,000 worth @
$20 per share at the open.  Based on 3-year back-testing and optimization,
the algo suggests an initial fixed stop of $700.  If the value of your 500
shares dropped by $700, your shares would then be worth $9300.  $9300
divided by 500 shares equals $18.60 per share.  Your initial fixed stop should
therefore be set at $18.60.  All stops on all Premium Plan and Crypto Plan
covered items start with a fixed stop.

Most items that I cover back-test best when my AMA/Momentum Algo

sticks with the initial fixed stop throughout the trade.  A few items however
back-test a little better if a trailing stop is also utilized.  The trailing stop I
use in Trade Navigator adjusts the level of the trailing stop at the open of
each bar to be X number of dollars away from the price extreme so far in
the trade.  Using the NUGT algo again as the example, if an opposing small
arrow appears during the trade, my AMA/Momentum Algo suggests
changing the stop to a $1100 trailing stop.

Let’s say price has moved up from the initial buy entry point of $20, and
peaks at $25 per share, but then pulls back to close at $23, and a small
opposing arrow appears (down-pointing, in red).  The algo is suggesting
cancelling the initial fixed stop ($18.60), and initiating a new trailing stop
$1100 below the high of the trade so far, which was $25.  You still own 500
shares, which, at the high of $25 were worth $12,500.  If the value of those
shares dropped $1100 from that peak to $11,400, the share price would be
$22.80.  The new trailing stop should therefore be set to $22.80.  When a
trailing stop is in play, the stop should continue to be adjusted daily to
$1100 below the “in trade high”, if a new “in trade high” has occurred.

Example of an ETF trade that utilizes a trailing stop:

As a reminder, our Premium Plan and Crypto Plan Nightly Screenshots will
automatically show you the suggested level of the fixed and/or trailing stop
all during the trade, after the trade has been underway for 24 hours.  The
initial stop, entered at the same time as the position entry, is the only time
you will need to calculate the initial fixed stop level.  It’s easy to do!

P.S.  Both screenshots above show items that are not currently involved
with a trade.  The algo is “flat”.  The screenshot of the US Dollar Index below
shows what the nightly algo screenshots look like when an item is currently
involved with a trade.  Notice the automated algo notification of the current
placement of the stop, which in this example, changed to trailing on June
25:

- Sid Norris – June 2019