Jim Kane 07 Trailing Stops

I(ane Trading on:
Trailing
Stops
by Jim I(ane
Tips, ideas and techniques for market traders
Kane Trading on:
Trailing Stops
By Jim Kane
KaneTrading.com
Kane Trading on: Trailing Stops
Copyright © 2003 by James J. Kane
Published by Kane Trading
ALL RIGHTS RESERVED. No part of this publication may be reproduced,

stored in a retrieval system or transmitted in any form or by any means,
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without prior written permission of the publisher and the author.
This publication is designed to provide accurate and authoritative

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understanding that the publisher and the author are not engaged in rendering
legal, accounting or other professional services. I f professional advice or
other expert assistance is required, the services of a competent professional
person should be sought.
Printed in the United States of America

Disclaimer
No claim is made by James J. Kane, or Kane Trading, that the trading

methods shown in this book will result in profits, or will not result in losses.
There is a substantial risk of loss in trading securities, options on securities,
futures, options on futures or any other trading vehicle. Past performance is
not indicative of future results. Trading securities, options on securities,
futures, options on futures or any other trading vehicle may not be suitable
for all recipients of this book. Always seek competent professional advice
when considering any trade. All examples in this book are for educational
purposes only. All material and examples in this book are based on
information obtained from sources that are believed to be reliable, but which
are not guaranteed as to their accuracy or completeness. Nothing in this book
should be construed, in any way, shape or form, as a solicitation of any offer
to buy or sell any trading instrument. James J. Kane, his family and friends,
and associates of Kane Trading have at times in the past and may now or at
times in the future, trade or have traded any or all of the issues used as
educational examples in the book. Any thoughts or opinions expressed in
this book are subject to change without notice. No information provided in
this book should be construed in any way as an encouragement by the
author, publisher or distributors to trade. Each trader must make his or her
own decisions with regard to trading. Each trader must be responsible for his
or her own decisions and his or her own actions, if any. Purchasing or
reading this book or parts thereof constitutes acceptance of and agreement to
this disclaimer and exempts the author, publisher and distributors from any
and all liability and litigation.
v
Table of Contents
Acknowledgements
.
IX
Introduction 1
Chapter 1 Trailing Stops Overview 3
Chapter 2 Which Trend? 7
Chapter 3 Moving Average Cross 17
Chapter 4 Moving Average Crossovers 55
Chapter 5 Regression Channels & Trendlines 79
Chapter 6 x-Bar Stops 145
Chapter 7 Fixed Amounts 165
Chapter 8 Fibonacci Stops 185
Chapter 9 Blow-Off Moves & Windfalls 221
Chapter 10 Scaled Exits 237
Conclusion 265
Vll
Acknowledgements
In my evolution as a trader I've read more material than I can even recall.
The maj ority of this material has contributed very little to my knowledge
base. That lack of value, for me, in the material, in and of itself, is important
information. It' s shown me, by a process of elimination, the things that don't
help me, and I can use that information when formulating a trading plan.
In developing material related to Fibonacci trading, two sources have been

of great help. I would like to acknowledge these sources, and recommend
that readers look into their materials. See if they might be of as much help to
your own trading, as they were to mine.
I'd like to acknowledge Scott Carney over at Harmonic Trader. Scott's book,
The Harmonic Trader, and the material on his website
(www.HarmonicTrader.com). opened my eyes to another way to view the
markets. This was my first substantial introduction to the concepts of
Fibonacci and harmonics in trading the markets. Scott has quite extensive
information on harmonic patterns on his website and has developed several
patterns of his own. Scott and I have since spent endless hours discussing
harmonics and the markets. His historical knowledge of the markets is
extraordinary and has contributed greatly to my own knowledge base.
I 'd also like to acknowledge Robert Miner at Dynamic Traders Group, Inc.
(www.DynamicTraders.com). Robert's book, Dynamic Trading™, was my
next serious excursion into Fibonaccis and trading. This book is extensive
beyond belief. There is so much material in Dynamic Trading™ I would
have to consider it must reading for anyone interested in increasing their
knowledge of F ibonacci in trading and in Elliot wave analysis. Robert's use
of the time factor is also extensive and will open one ' s eyes to factors
outside of just price. Robert also has Dynamic Trader software available,
which I use for creating charts labeled with various Fibonacci, harmonic and
time factors. It is the software that I used to create the charts for this book. I
would like to extend an additional thanks and acknowledgement to Robert
for allowing me to use these charts in my works. Information on his
products is available on his website. I recommend checking it out to see if
you feel that it has information that you can use to help your trading. His
contributions in the field are practically immeasurable.
IX
Introduction
One of the most challenging aspects of trading can be when to book profits,
once you have some. I 've frequently heard many traders say 'That's a
problem I ' m not too worried about ! ' On the contrary, I think it' s very, very
important, and I spend a lot of time worrying about it. To me, maximizing
profits is critical to long term trading success.
There' s an old trading maxim that says ' Cut your losers short and let your
winners run'. That one is just about as cliche as 'The trend is your friend'.
As far as I'm concerned, though, those two sayings are not only true, but are
also critically important to long-term success.
Picture the following scenario. You get into a trade and it starts to go your
way. You are happy. Then it turns against you, so you sit tight. Your stop
comes into range, but it sure looks like it should tum back around. So you
move your stop.
It continues against you, but you figure you've already paid your dues. If
you stop out now you'll take a big hit, and then it will do exactly what you
expected. So you move your stop again. This repeats over and over, as you
keep hoping that soon it will finally tum in the 'right' direction.
You are saying things l ike 'It j ust can't keep going in this direction, it must
tum soon' , and so on. Finally, you can't take the pain any more and you
close the position out at a huge loss. But you aren't deterred from trading.
You open another play when a signal comes up, and this one is different. It
quickly goes your way, and you are thrilled. All of the sudden it turns on a
dime, and starts to go against you. The above game repeats again, and now
you have two whopping losses in a row.
You swear that will never happen again. If you get a profit, you' l l take it.
They say that you can't go broke taking profits, right? The next trade comes,
and it starts to go your way. Then it stalls, and 'Bamm' , you take those
profits. This one isn't going to tum into a loser on you.
The street is filled with cliche sayings, and you must have j ust forgot before
that 'you never let a winner tum into a loser ' . So you pat yourself on the
1
back for taking that small winner, and never give a thought to the huge
losers. Then you get to watch the trade that you closed at a profit run and run
and run, after you took about five percent of what you could have gotten.
I ' m not going to say that cliche about not going broke taking profits is
hogwash, but if the profits you take don't cover your losers and your
expenses, you sure will go broke. More money going out than coming in
will ruin any business. What you've done is let your losers run like they
were winners, and cut your winners short like they were losers. This is the
exact opposite, of course, of what you should do.
This book will address one technique for letting your winners run: trailing
stops. There are other techniques for maximizing winners, for example
scal ing out of positions at key areas. In most of my trading I use a
combination of techniques, but I just about always use trailing stops on at
least some of my position.
One of my favorite sayings, one that I coined, is "Trai ling stops are so good,
I can't believe they aren't illegal ! " Of course I coined that in j est, but it
makes an important point. I think trail ing stops are a very powerful
technique for maximizing profits when in a trend trade. They let the market
decide when the trade is over, instead of the trader just taking profits when it
seems like a good time. It changes the decision from a somewhat haphazard
guessing game to a much more technically oriented decision.
I will not address minimizing losers in this book; I will focus entirely on
trailing stop techniques on winning trend trades. I mention this here because
I included in the discussion above, in some detail, letting losers run. I only
discussed this because it gave some context to the whole picture. Setting
initial protective stops and dealing with trades that don't pan out falls under
initial trade management. If you desire more information on trade
management, please refer to my book Kane Trading on: Trade Management.
Understand that thi s book is designed to present to the reader with one very
specific concept, for use in one very specific part of a trading plan. I will
present many variations of the concept, but they will all share a common
application. Trailing stops, as I present the techniques here, are designed to
maximize existing profits in an already successful trade, and to do so using
the unfolding price behavior to guide the decisions.
2
Chapter 1
Trailing Stops Overview
Trailing stops are a very i mportant part of my trading plan. They allow me to
let a winning trade run, letting the market action decide on when to take the
trade off, as opposed to pre-deciding when to take profits. That is not to say
that I ' m opposed to profit targets, in fact I use them quite a bit. On the other
hand, though, I almost always prefer to let at least some portion of my trade
run, with a trailing stop following behind it.
I have found, for my own trading, that a combination of profit targets and
trailing stops work best for me. Traders have to determine for themselves
what works for them, and their trading plans. Some traders may l ike to use
profit targets entirely, whi le others may prefer just using trailing stops. Stil l
others may l ike a combi nation o f both techniques, and some may not use
either technique. The point is to determine what works for you. I can only
present what I prefer. I hope that you can use and/or modify it, and have it
help you. As long as the context of what I ' m presenting is clear, I think what
I present will be of benefit.
The basic idea behind a trailing stop is to have a stop that follows the trade
as it moves in the trader' s favor, just behind the current action enough to not
get hit by ' noise ' . This allows the trade to run its course, ' maximizing' the
profits to some extent. Although there is, obviously, no 'perfect' way to do
this, decisions can me made, tailored to each issue, to increase the
effectiveness of the technique. And, as with most techniques, the skill and
expertise in doing this comes with time and practice.
The starting point is to have a bagful of variations on the techniques, and

then experimenting with them (as always, with 'practice trades') until you
find what, if anything, works for you and your trading style. I will present a
host of variations on the trailing stops techniques, with comments as to my
thinking process when I attempt to decide on what variation I may use in a
given situation.
It would be an easier presentation for me if everything was simply cut and

dried, but alas it isn't. I base my decisions on experience, and all I can offer
i s to include as much ' discussion' about what I ' m thinking as I can, as I
3
present a technique or variation. I have found that when I'm reading about a
technique myself, that type of discussion is invaluable to me. Hence, I have
chosen to follow that path i n my own presentations, hoping it will help my
reader as much as it has helped me.
The technique of trailing a stop i s valuable, I feel, because it i s dynamic. It

takes into account the market action of the moment, and how it is changing.
If you use a profit target that target is set i n advance, well before the price
action nears the area of the target. Although the actual closing of the trade
depends on the price action actually hitting the target area, for the most part
there i s no dependence on the unfolding price action i n the decision process
used to determine the target area. The target area is pre-determined, based
solely on previous price action.
This technique, then, loses an active dynami c with the market. No matter
what the market does, the target j ust sits and waits. The trade close i s
executed if the price action hits the target. Many traders put in their order to
close the trade ahead of time and, as long as an OCO (one cancels the other)
or similar order i s i n for the protective stop loss, walk away from the market
and ' let nature take its course' , so to speak. That shows just how ' un
dynamic' this method is.
I prefer a more interactive method, and here ' s why. I feel that maximizing
the profits, when they are potentially available, is very important to long
term success in this business. The only way to have a net profit i s to have
money left over when you subtract the losers from the winners. To improve
that net profit amount, you can try to minimize losers or maximize winners. I
try to do both, as best as I can. I see no sense to look at only one side and not
the other.
Given this approach, I want to catch as much of a move as I feel that I can. If
I'm in a trade, and I have what I consider to be a reasonable profit, if I take
the profit and then some news comes out, or a fund starts buying the i ssue,
I ' m not involved. B ut I was in, and in this example, the issue did nothing to
indicate to me that it was turning around. Yet I closed out anyways. To my
way of thinking, that makes no sense. I certainly will scale out of a trade
when I have a certain amount of profit, but then I ' ll attempt to capitalize, on
some part of the trade, on further potential moves i n the issue.
4
This is a dynamic approach, where the price action itself helps me to
determine when to close the trade. To do this, I use a trailing stop technique.
I use a technique that 'trails' along behind the price, adj usting to the action,
and changing, as the price action changes. And, in general, what kind of
form do these stops take? Frequently, they are very similar to the entry
techniques I have presented in Kane Trading on: Entry Techniques. These
include various uses of moving averages and moving average crossovers,
trendlines, regression channels, and swing-point violations/retracements.
Although this is an oversimplification and doesn't take timeframes into

account, it happens that many times a technique that indicates a potential
entry would also be a heads-up, if you were currently in the trade in the
opposite direction, that perhaps it's time to exit. If you have read Kane
Trading on: Entry Techniques you will definitely see similarities between
the entry techniques and many of the variations in this book used to exit
trades.
Keep in mind, though; it is not simply applying the same approach on the
other end of the trend. The techniques i n this book, and their variations, are
designed as exit techniques, and have unique characteristics that differ from
the entry techniques. I point out that there are similarities between the
techniques because it i sn't a coincidence, and pondering this could lead to
some enlightenment. But I caution the reader not to draw too many
conclusions, either, and to understand the differences in how the entry and
exit techniques are applied.
Although the trail ing stops concept is far from perfect, and is no panacea,
sometimes it works so well that it is almost amazing. As I mentioned, I joke
that trailing stops are so good that I can't believe that they haven't made
them i llegal. I hope that you will be able to make as valuable use of them as
I have. As always, I encourage the reader to experiment with, modify, and
test any technique that you encounter, and decide if it has anything to offer
you.
5
Chapter 2
Which Trend?
I spent a little time trying to decide what the title for this chapter should be. I
thought about what trailing stops had taught me, and it became clear. One of
the most important things I discovered when I developed my trailing stops
techniques was the trend. ' What? You discovered the trend?' Yes, I finally
'figured out', for my trading, what a trend is. You see there can be many
different ways to look at the same chart and characterize its trends. What
areas are in trends will totally depend on how you define a trend.
This is the most important concept I want to pass on with this book. Know
your trend. Know what you are trying to trade. In my many encounters
trying to help out fledgling traders, I've had one very common experience.
One of the first things I ask an inexperienced trader, in reference to
critiquing a past trade that they bring to me, is ' What was it, specifically,
that you were trying to do right there, as you opened this trade that you are
showing me?'
I ' m sorry to say, the answer that I get i s almost always not what I hope to
hear. I get answers l ike ' I was trying to make money', 'I was trying to sell it
for more than it cost me' , ' Buy low and sell high ' , 'Be a successful trader' ,
and so on. When I get into a trade I get in for very specific reasons. I have a
clear setup outlined, and a clear entry trigger.
I have pre-decided on the size of the position, and the theoretical amount to
risk. I already know what I think might happen, and I know how I will
manage the position if this expectation plays out, and if it doesn't. I have
thought out every last possible outcome that could happen once the trade is
open, and I mean every last outcome. I am able to answer every conceivable
question about a trade that I am in off the top of my head.
If I felt that there were any questions I couldn't answer, I wouldn't be in the
trade. It would mean, to me, that there are possible consequences I haven't
considered; consequences that I would then plan to think out i f that event
occurs. That would go 1 00% against my master 'Trading Plan ' . I can't
control what the market does, but I sure can control my response to anything
it can do.
7
Now, what does all this imply? Why bring all this up right now? This book
is about how to manage trend trades that have begun to move in the trader's
favor. It's a book about how to attempt to maximize the run, once a trend is
'caught ' . But alas, how can you maximize a trend if you don't know what
trend it is you are trying to catch? Or even what a trend is? I feel that it is
critical to know what you are trying to accomplish before you try to work
with the techniques that I wi ll present in this book.
Understand, I am not saying come up with a mathematically rigorous

definition of the trend that you are trying to 'catch' . What I am saying is, be
able to pull up a chart and say something l ike 'That move, right there, that is
what I am trying to play. This one and that one there, they are not what I am
trying to play. ' You should be able to see, visually, exactly what you are
trying to do, and what you are not trying to do, and how they differ from
each other.
As long as you can see, on a chart, what you are trying to do, that is
adequate, in my opinion. What I feel i s trouble is thinking too simplistically.
L ike thinking that as long as the issue is moving up (or down) it' s trending,
and you just pick a technique and go for it. The choice of techniques and
their variations, and the application of the techniques, should be adjusted for
the specific type, and variation, of trend that the trader is trying to play.
At this point, I think some examples would clear up what is, perhaps,
starting to get murkier than it need be. What I want to show is how there can
be many ways to attempt to play a trend, or a series of sub-trends. This
decision on how to play the trend will be determined by the trader's 'Trading
Plan'. It is outside the scope of this book to go into different aspects of
trends, and how to play them. This book will show various techniques to
trail stops on trends that traders have already qualified within their 'Trading
Plan' .
8
Let's look at an example in S . First, I ' ll show a daily chart that covers about
eight months of data, where S is strongly trending. See figure 2 . 1 .
Figu re 2 . 1
?: S 0 -0 1!!18i £J
5 . 000
0.000
35 .000
30 .000
25 .000
20 . 000
Mar Apr May Jun Jul Aug Sep

Chart created by Dynamic Trader (c) 1 996-2001
The uptrend in S is pretty obvious on this chart. But does that imply that if
you are a trend trader that your goal is to catch as much of this move as
possible? The answer is: it totally depends on what your trading plan is.
Did you try to catch a reversal at that bottom in March? Are you playing
pullbacks as the trend continues? Did you look for a first pullback entry after
a major reversal, such as the March bottom turned out to be? The list is
endless. Each case is different, and perhaps plays for a different move. It is
the anticipated move that helps guide the management choice.
9
Let me outline some possible trends on this S chart that a trader may attempt
to catch. I ' ll present multiple charts, with some discussion as we progress.
See figure 2.2.
Fig u re 2 .2
11 1
j'1i1}
"
?: S 0-0 I!!IS £I
5 , 000
V� 0,000
35 ,000
��j
30, 000
��
25 ,000
t4
�\,J 20 ,000

Chart created by Dynamic Trader (c) 1 996-200 1
Here is one thrust up in this larger scale uptrend. This might be an example
of what a 'buy pullbacks in a strong trend' trader might try to capture.
Understand, as I highlight examples of what certain traders may try for,
these are only examples.
Not only am I not saying that anyone could or did actually catch any of these
particular moves, I ' m also not suggesting the entire move could ever be
caught, except by pure chance. These are moves that traders may, generally,
attempt to catch a part of. These examples are the possible 'target' moves
that traders may look for.
10
Let me highlight several more similar moves on this S chart. See figure 2 . 3 .
.rlYt
Figure 2.3
�:. S D -D !lEI £J
5 . 000
0.000
35 . 000
30 .000
25 . 000
. 20.000

I 've highlighted an additional four possible moves that our example trader
may have tried for. There certainly are others on this chart, depending on the
trader' s criteria for entering a trade. It' s not my purpose here to analyze the
viability of this trading method, or to point out moves in the above chart that
didn't play out.
What I want to show is how a trader may look at a chan, and point out what
moves he or she would be attempting to trade. From this analysis, the trader
can then experiment with the techniques that I will present and try to find
one or more that helps them stay in those moves, when they play out in the
trader' s favor.
11
Let's move on to another way to look at this same trend. See figure 2 .4.
Figu re 2.4
::.:: S 0 -0 BEl £I
0.000
35 . 000
30 . 000
25 .000
20. 000

This approach views the trend as one whole, continuous move. Pullbacks
would be 'ridden out ' . The trader is, perhaps, trading off of a weekly chart,
and has found the March low to be a potential trade area in the context of the
larger timeframe chart. This entire up move may not be that large, in the
context of the larger timeframe chart.
So, why not just always trade for the larger move? For one thing, it is very
likely that the initial protective stop, if the stop were technically chosen,
would have to be much wider for the larger move than the stop needed to
play moves within the trend. Perhaps that doesn't fit a given trader' s style,
and game plan. Or perhaps the trader has a maximum length of time he or
she prefers to hold a trade. These factors, and many others, can play into
what moves a trader may attempt to capture.
12
Let's look at another viewpoint. I ' l l zoom in on the chart so the moves are
easier to see. See figure 2 . 5 .
Figure 2 .5
j
:.-:. S D-D II!EU3
0,000
38 ,000
36 , 000
34 ,000
32 ,000
30 ,000
28 ,000
May 9 16 23 30 Jun 13 20 27 Jul 11

Now, this looks just like the chart where I highlighted the thrusts from
pullbacks, in figure 2.3 . A strong trend takes off and the moves that ensue
from the ends of the pullbacks are the moves that the trader is attempting to
trade. So why i s this different? Great question, and I ' m hoping you are
asking it.
13
Let's add the data back in that we started with, and see these moves in the
initial perspective. See figure 2 .6.
Figu re 2 .6
% .
?':'S D-D B8 £!
j'1/1J+'
5.000
VJ 0 . 000
35. 000
��j
30 . 000
��
25.000
f�
�\,J . 20 . 000
Mar Apr May Jun Jui Aug Sep

It is clear to see that those are really small moves, compared to the other
moves I 've highlighted and discussed so far. In fact, these two highlighted
moves are two of three thrusts that make up the very first move I highlighted
in figure 2.2. I n my opinion, the moves highlighted in figure 2.6 would have
to be analyzed on a lower timeframe, and perhaps have an entry trigger on
yet even lower timeframe than the one used for the analysis.
So why even show them on a chart l ike this? Because some traders will only
trade moves l ike this off of a chart that shows this much context. They prefer
a strong larger scale trend, and then they look for pul lbacks from the thrust
moves within that larger trend. They may go down multiple timeframes to
enter and manage their trades, but they really key off the larger chart.
I have made it clear in many of my works that I utilize three timeframes (and
sometimes more) for my trading. The m iddle timeframe is the 'traded'
14
timeframe. The lower timeframe i s for entry triggers, and the higher
timeframe is for context. I prefer not to trade without knowing the bigger
picture. Some traders will not trade unless the 'context' timeframe i s more
l ike my 'traded' timeframe. These traders like to go in and out multiple
times on moves that many would consider a single move.
The point is traders make these decisions for themselves, and then they seek
out techniques that will work for them, in the context of their individual
plan. That is what I am trying to get across here. You must decide, on your
own, what it is you are trying to do with your trade. When you know what
you are attempting to do, clearly and concisely, you will then be in a better
position to understand the context of the techniques that I will present. You
will be in a much better position to experiment with these techniques, and
decide how you might use them, i f at all, or how they might be modified to
suit your needs.
I will begin with one of the simplest techniques, the moving average cross.
Although it is very simplistic, it is still one of my favorite techniques in
many situations.
15
Chapter 3
Moving Average Cross
The moving average cross, in my opinion, i s one of the simplest, if not the
simplest, of the techniques that I work with as a trailing stop. I find that there
are many situations where very basic techniques work the best for me. As a
general rule, when I have multiple choices of techniques to choose from, I
like to go with the simplest, all other things being equal. It is in this way that
the moving average cross technique shines.
Before I proceed with laying out the technique, I want to make a few points
clear. When I trade a trend, I generally do not like to hold through pullbacks
that are noticeable on my traded timeframe. This is because I, for the most
part, look to get on board trends utilizing pullbacks defined with the
Fibonacci groupings technique. I try to ride the trend until I feel that ' wave'
of the trend is over, and then look to re-enter for the next ' wave' , if I feel it
is feasible.
Given this, I will start by presenting the moving average cross technique as I
use it, to 'catch' individual waves on my traded timeframe. I will then show
an alternate way to use the technique to accomplish roughly the same end,
but on a lower timeframe. This will provide a way to sit through pullbacks,
albeit on the lower timeframe. With this new variation, though, one can then
expand the technique to the original time frame that we started with, and
hence ride that trend through its pullbacks, if that is the trader' s desire.
This will all become much clearer once we begin the examples. Again, I am
not going to focus on trade setups or entry techniques in this book, j ust
trailing stops. I will present examples that have been chosen only to
demonstrate the various trailing stops techniques.
17
1 ' 11 start with an example in LEN. I am looking at the daily chart, with a
potential trade area that amounts to a pullback in an uptrend. I ' l l put an
arrow on the chart, to show the area where I am looking for the uptrend to
resume. See figure 3 . 1 .
Figure 3 . 1
?... lEN 0-0 1513 £1

2 . 000
tj {I1!
1 . 000
i
0.000
H
39 . 000
flj
38 .000
'"
j
37 . 000
t
36. 000
j
I
35 . 000
j 26 Nov 9 16 23
Chart created by Dynamic Trader (c) 1996-200 1
30 Dec
34 .000
33 .000
My trading plan here calls for not sitting through any substantial pullbacks
in this timeframe. Hence, I am going to start out with a very short period
moving average. I will choose a 5-period simple moving average, calculated
based on closing prices. Let me add this average to the chart. See figure 3 .2 .
18
Figu re 3.2
'
j
?. LEN D-D !I[;I F!I
2 , 000
I1 ir)
1 .000
0 , 000
39 ,000
W
38,000
"-
37 ,000
36 ,000
35 ,000
34 ,000
33 ,000
26 Nov 9 16 23 30 Dec
Chart created by Dynamic Trader (c) 1996-2001
Keep in mind, there i s an entire series of processes going on here that we are
not going to look at, such as why I am considering a trade in this area in the
first place, how I will get into the trade, and so on. For all the examples that
I will present in this book, the assumption is that the trades are all setup and
executed according to some well thought out, effective 'Trading Plan'. We
will just focus on what happens when the trade begins to go in our favor.
19
Let me add some data to this chart, as LEN starts to move in favor of this
trade setup. See figure 3 . 3 .
Figu re 3.3
j
?: lEN 0-0 I!!GU3
5 . 000
4 . 000
3 . 000
I1 1I W
2 . 000
)
1 . 000
H
�f 1ft
1!
0 . 000
39.000
38 .000
I"\.
37 .000
36 .000
35 . 000
34 .000
33 . 000
2f, Nov 1f, 23 30 Dec 14

The uptrend has now strongly resumed, and the previous swing-high point
has been significantly exceeded. In my own trading, I use two criteria to ' put
me on alert' to start thinking about taking some profits. I put two external
retracements on the chart, a 1 .272 and a 1 .6 1 8, based on the previous swing
high point and the pullback I used for entry.
Once I cross the 1 .272 retracement line, I start looking to scale out of some
of the trade. I also look at the area that is at about approximately one half of
what I consider the average ' successful' move, based on my extensive study
of the i ssue' s past price action. Frequently, I find the two areas land in about
the same place.
Many moves end between the two retracements that I mentioned. On the
other hand, some continue on for a much greater move. This is why I use a
trailing stop to trigger me out, for some, or all, of the trade. Let's first look
20
and see where we are with respect to the 1 .272 and 1 .6 1 8 external
retracements.
Keep in mind, I would normally put these retracements on my chart as soon

as the pullback is complete and the i ssue starts resuming the trend that I am
watching. I am adding them now only because it would have been unclear to
the reader for me to add them earlier. Once I feel that the concept is clear I
will add them right away, i f they are needed for the example. See figure 3 .4.
Figu re 3.4
--+
?. l E N D - D 1!!8 £I
-+
5 . 000
44.327 Ret 1 .613
4 . 000
43 .046 Ret 1 .272 3 . 000
2 . 000
1 . 000
0 . 000
39 .000
38.000
37.000
36 . 000
�
35 . 000
34.000
33 . 000
26 Nov 16 23 30 Dec 14
At this point LEN has already thrust right up through both retracements, and
has thrown a ' spinning top' bar. With certain styles of trade management,
some traders would take the trade off right here. Statistically, that is not that
untenable of a position to take. Myself, I want to let at least a part of the
trade run.
To do this, I am going wait for a close below the moving average. I must
qualify this, though. If there is a large gap down and LEN were to keep
dropping, I would likely take the trade off right there, and not wait for a
21
close. If LEN started to plunge and went through the average hard, and kept
going, 1 ' d also likely take the trade off right then.
When I discuss the use of these techniques, I am always discussing them in

the context of ' normal' price action. Nothing in these techniques is designed
to override the normal protective measures that should be set about in the
master 'Trading Plan' to deal with aberrant or unusual situations.
Let's move ahead two bars on the chart and see what LEN is doing, and how
the price action is looking with respect to the 5-period simple moving
average. See figure 3 . 5 .
Figure 3.5
jl
?. LEN D-D 1!!18 £J
-t
6 . 000
�
44.327 Ret 1.618
4 . 000
43.046 Ret 1.272
2.000
38 .000
36 .000
34 .000
26 Nov 16 23 30 Dec 14
Chart created by Dynamic Trader (c) 1996·200 1
So far LEN has risen without taking out the low of any previous price bar
since entry, and hasn't even touched the moving average, let alone crossed it
and closed below it. We are way above the 1 .6 1 8 external retracement at this
point. If one chose to take profits in the area of the retracements, all of the
potential of this additional move would have been lost.
22
Let's add in another bar, and reassess. See figure 3 .6.
Figure 3.6
� l E N D-D 1I!r:J £I
6.000
--�r--f-- 44.327 R�t 1.518

4 . 000
-----jl-f-- 43.046 Ret 1.272
2.000
0.000
38 .000
36 .000
34.000
26 Nov 16 23 30 Dec 14 2:
LEN has finally taken out the low of a previous bar in the uptrend. Some
traders use thi s as an exit trigger. I sometimes use this technique myself, as
we'll see in a later chapter. Notice that LEN got very close to the moving
average, but reversed and finished the bar with a close on the high of the bar.
At this point I am still watching as the trade unfolds.
23
Let's add in two more price bars, and see if that break below the previous
price bar was a signal that we should have been watching more closely. See
figure 3 .7.
Figure 3 . 7
) 11
'
?: LEN D-D l' 1!! 8 EJ
8 . 000
6. 000
-- -t--+ - - 44.327 Ret U1S

4 . 000
---t-f---- 43.0� Ret 1 .272
2 . 000
0.000
38 . 000
36 . 000
34 .000
2& Nov <) 1& 23 30 Dec 14 21

Chart created b y Dynamic Trader (c) 1996-200 1
Well, LEN just keeps going up here, and the price action has moved away
from the moving average. We are now up more than a full $4.00 above the
1 .6 1 8 retracement. This is why I don't l ike using just profit targets, and why
I make heavy use of trailing stops.
24
I ' ll add in one more price bar of data, and reassess. See figure 3 . 8 .
Figure 3.8
�-;, LEN l)ol) I!I3I!1
8 . 000
6.000
----J---/--- 44.327 Ret 1 .� 18

4 . 000
---+-+--- 43.046 Ret 1 .272
2 . 000
38 .000
36 . 000
34 .000
26 Nov '3 16 23 30 Dec 14 21

Chart created b y Dynamic Trader (c) 1 996-200 1
F or the first time since this trade started, LEN has moved below the moving
average. The price probe was very small, though, and LEN closed back
above the moving average. The exit, as I 've defined it, would not yet be hit.
Now, would it perhaps be wise to scale out of some of the position at this
point? Absolutely. I ' m not discussing this here because I first want to just
present the basic concepts and techniques, and later expound upon some
possibilities. The last chapter focuses on just this very topic, and is called
'Scaled Exits' .
25
Let's add in two more price bars, and see what is happening. See figure 3 .9.
Figure 3 . 9
::::: LEN 0-0 !IS £I

'
8 . 000
----t--+--- 44.327 R..t LE.la
---++---- 43.046 Ret 1.272
38.000
36 . 000
34 . 000
26 Nov '3 16 23 30 Dec 14 21 28

That's it; the exit would now be triggered with that close below the average.
For the sake of the example, let's record the exit price as $46.82, the closing
price of that last bar. This is not to say, of course, that anyone could, or did,
get filled at that exact price, but we want to be able to make relative
comparisons between techniques here, for the sake of our study.
Note that the higher 1 .6 1 8 retracement was at approximately $44.3 3 . The bar
low that was violated on the way up was at $45 .70, so an exit below that bar
could be recorded as $45 .69, for comparative purposes. To summarize, the
exit on the high end of the retracement profit target was $44.3 3 , the bar
violation was at $45.69, and the moving average cross was at $46.82. In this
case, the moving average trailing stop 'milked' a considerable amount more
out of the trend.
26
I ' ll add two more bars onto the chart, and make some comments. See figure
3 . 1 0.
Fig u re 3 . 1 0
jlY1
?: lEN D-D I!I3 £I
8 , 000
6, 000
44.327 Ret 1.6 18

4 , 000
43,046 Ret 1.272
2 , 000
0 , 000
38 ,000
1
36,000
34 ,000
2G Nov 9 1G 23 30 Dec 14 21 28
The strategy met my needs quite well. Remember, I didn't want to sit
through any pullbacks of note on the traded timeframe, and that's what I got.
I was triggered out before the pullback went very far. Now, this is not a
testimony as to whether or not exiting the trade i n this general area was the
best trading decision or not. It is a testimony to meeting the needs that the
trader specified.
The technique was based on what was asked for, and it did a very good j ob
at that. If the intent were to ride out the pullbacks on the traded timeframe, a
totally different variation of this technique would have been chosen. What
variation? Well, let me work my way towards that by first taking a different
look at the very same trade we just covered, but this time, on a lower
timeframe.
27
Before I proceed, though, I want to discuss an important point. In Kane
Trading on: Entry Techniques I make it quite clear that I just about always
drop down one time frame from my traded timeframe to look for, and
implement, my entry techniques. What relative timeframe, then, do I use for
exit strategies and trailing stops? Do I use the traded timeframe, as in the last
example? Or do I drop down, like we are about to do? The answer to that is
question is that it depends on the issue, how it is behaving, and which
particular technique, or techniques, I have chosen to use.
With my entry techniques, I j ust about always drop down to the lower
timeframe for my entry trigger. With trailing stops, it will vary. Sometimes I
drop down, and sometimes I use the traded timeframe. All I can offer the
reader is what I always try to offer, and that is to include my thoughts and
analysis as I present the techniques and variations. Then, it is my hope that
readers will be able to make informed decisions on how to experiment with
the techniques, and find something that will suit them.
28
With that said, let's move on, back to the example with LEN, but this time
down on the 60-minute timeframe. I ' ll start with how LEN looked at about
the same point that it was at on the daily chart in figure 3 . 1 . See figure 3 . 1 1 .
Fig u re 3.1 1
?: LEN 60-1 . !lEla

2 , 000
1 . 000
38 ,000
37.000
36. 000
35 ,000
��--�----�--��--
27t 28w 29t 30F Dec3m 4t 5w 6t 7F Dec10m
The assumption, again, is that the uptrend in LEN will continue from this
potential trade area.
29
I ' ll add in some more data, to show the resumption of the uptrend. See figure
3 . 1 2.
Figure 3 . 1 2
?:'. tEN 60-1 !lEi £i

2 , 000
1 . 000
0,000
27t 30f Dec3m <It 5w 6t 7f Dec10m llt 12w

At this point I would add in the 1 .272 and 1 .6 1 8 external retracements, to

help guide me with my analysis. Understand that putting these retracements
on the chart helps me make my decisions, but they are not necessary in order
to use the trailing stops techniques that I present in this book.
I point them out and put them on the charts so that the reader can see yet one
more technique that I use in my trading. I feel that there is a synergistic
effect in my trading that is produced when I combine this retracement area
with trailing stops. I f the reader feels that it is not useful to him or her, this
step can simply be skipped.
30
I will add more data onto the chart and add the retracements, in one shot. See
figure 3 . 1 3 .
Figure 3 . 1 3
I
?: LEN 60-1 BEl £J
5 . 000
�327 R" .':'
4.000
_______ ..1- 43 .041; Ret 1 .212 3 . 000
2 . 000
1 . 000
0.000
39 .000
38 .000
37 .000
36 . 000
35 . 000
27t 2Sw 29t 30f Dec 4t 5w I;t 7F Dec llt 12w 13t 14F Dec :
LEN gapped up big, right into the area of the retracements. As mentioned
before, many traders would consider this a great opportunity to take profits.
This is the area I said that I begin to look at taking some profits, since I find
that many trades begin to reverse in the area of these two retracements. I will
leave any further discussion on taking profits in an area like this for the last
chapter on scaled exits.
Right now, I want to look at a moving average cross trailing stop on this
timeframe. Before I said that I didn't want to sit through any pullbacks on
the traded time frame, hence I chose a very short 5-period moving average
for my trail . Now I am on a lower time frame , and to accomplish the same
obj ective, I must sit through pullbacks on this timeframe. In order to not
penetrate a moving average on this timeframe, it would have to be a lot
longer period moving average, or the normal oscillations will go right
through it.
31
So, how do I choose a reasonable starting point? To start, recall that I used a
5-period moving average on the daily timeframe. I am now on a 60-minute
timeframe, so the daily timeframe is 6.5 times as long, per price bar, as the
new lower timeframe. This is obvious because the regular trading hours for
stocks is 6.5 hours. If this were a futures contract or other trading vehicle
with different trading hours, I would take that into account when I do this
calculation. Hence, if I multiply 5 (the period length of the moving average I
chose for the daily timeframe) times 6.5, I get 32.5.
This 32.5-period moving average on the 60-minute chart will approximate

the 5-period moving average on the daily chart. As we will see, though, this
trai ling stop will be a bit more ' sensitive' because it will trigger with the
cross and close of j ust one 60-minute price bar, whereas before it would take
the cross and close of an entire day's trading before it would trigger.
For this reason, I generally lean a bit towards lengthening my choice for the
lower timeframe. In this case, I ' ll use 34, since 34 is a Fibonacci number.
Perhaps you might try 3 5 and 40, as well as others, as you experiment with
this, to find what may work best for your trading. Keep in mind, though, to
determine the correct ' approximate' moving average for other timeframes,
you need to find the ratio of the timeframes, and multiply it by the choice
you made on the higher timeframe.
I ' d like to make a point about the pullbacks/oscil lations that I am likely to
see on this lower timeframe. What I am about to say is j ust an observation
on my part, but not only does it serve me extremely well in my own trading,
it' s something I don't recall seeing in other sources very often, if at all. I
consider this one of my best ' secrets' , or should I say ' observations that I
use ' . Here it is: moves that occur between noticeable pullbacks in the traded
time frame frequently have three or four waves, or 'thrusts' , themselves,
most noticeable on the lower timeframe.
If you look on the traded timeframe, too, there frequently are three or four
thrusts to that entire move. Hence, when I drop down to the lower
timeframe, as we are here, I am on the lookout for a three or four 'thrust'
move. This sounds a little bit Elliot wave-ish, doesn't it? It is, and I ' l l
explain how I came t o see this pattern.
I started to get very heavy into Elliot wave and other related techniques
shortly after I started trading. Although I almost never tried to trade wave
32
five ending points, I watched the many predictions for them, and too many
times for me to count I saw the market reverse, and then 're-reverse' and do
another wave. I jokingly, to myself, called these wave seven moves. The
structure of most of the issues I watched, though, wasn't the typical Elliot
structure, even up to the wave five point.
I frequently found the 'waves' pretty uniform, or if not uniform, varying

between themselves, but not with the third wave as the longest, and so on. I
then noticed many seventh waves, and sometimes ninth waves, as the issue
continued to trend strongly. I once observed a strongly trending issue do
seventeen nearly uniform 'thrusts', with all the pullbacks very shallow and
uniform. Jokingly, that would be a thirty three wave move, labeled in Elliot
terms (I am funning here, of course).
The point of all this is that, statistically, I find three thrusts (the Elliot
choice), or four, is the most common, with four getting the nod in my
experience. So when I approach three thrusts, I begin to do some profit
taking and tighten up some of my trailing stops. Yes, you can vary and add
in different trailing stops as you reassess the situation. When I drop down to
the lower timeframe for management, I can ' count the thrusts' and adjust as
the situation unfolds.
33
Let me add in some more data to the chart in figure 3 . 1 3 , and I 'l l also add in
the 34-period simple moving average of the close. After we examine this
chart, I ' l l start to highlight and count these 'thrusts' that I have been
discussing. See figure 3 . 1 4 .
Figure 3 . 1 4
t fIr
<
=?1. LEN 60-1 j' 1!!113 £I
6. 000
��
5 . 000
<4327 , ,, .. "S
4 . 000
------- -'tt-
- 43 .046 Ret 1 .272 3 . 000
2 . 000
1 . 000
0 . 000
39 .000
38.000
37.000
36 .000
35 .000
27t 2S...... 2':lt 30f Dec <k 5...... f,t 7f Dec 11t 12w 13t 14f Dec 13t 1
It is clear from the chart that LEN is trending way above the moving average
that we have added. It is also clear that the retracement area wasn't going to
stop LEN.
34
I ' ll highlight two clear thrusts that have completed since the trade initiation
point. See figure 3 . 1 5 .
Figure 3 . 1 5
?. lEN 60-1 !IS £I
6 . 000
5 . 000
-------H--;-:-- 44.327 Ret 1.& 13
4 . 000
-------+--'+\- 43.046 Ret 1.272 3 . 000
2 . 000
1 . 000
0.000
39.000
38 .000
37 .000
36.000
35 .000
271 28w 291 30F Dec 4t 5w f,1 7F Dec 1 11 12w 13t 14F Dec 18t 1
There are two clear thrusts that are obvious on the chart, and a third thrust is
in progress. LEN is very stretched away from the moving average. I would
expect that it will pullback soon, or possibly top out for this larger thrusting
move. But just because I expect something to happen, it does not necessarily
mean that I will act on it. That's why I use trailing stops, to let the move run,
and then tell me when it is over.
Would I possibly take some profits, though, as we approach the average area
for this thrust to end, being that it is a third thrust? I frequently do scale out
as the areas are hit that I consider statistically significant, and the end of a
third thrust is very significant to me. But remember the case I cited that had
seventeen thrusts. I trail some of the position, in order to catch as much as I
can of those outsized moves.
35
I ' ll add in some more data, and highlight the third thrust. See figure 3 . 1 6.
Figu re 3 . 1 6
�:. lEN 60-1 ," I!I3 £J
7 . 000
6.000
5 . 000
-------+.1---1::-- 44.327 Ret 1.E-1S
4 . 000
--------,f--1tf---/-- 43.046 Ret 1.272 3 . 000
2 . 000
1 . 000
0.000
39 .000
38 .000
37 .000
36 .000
35.000
27t 2Sw 29t 30f Dec oR 5w 6t 7f Dec 1 1t 12w 13t 14f Dec 18t 19w 20t
LEN just keeps going up. There is now a third pullback in progress, after
three very clear thrusts up. The price is still quite a bit above the moving
average, even after the pullback.
36
We'll move ahead, and see what happens. See figure 3 . 1 7.
Figu re 3.1 7
:::'1. LEN 60-1 !lEI £I
8 . 000
7 . 000
6 . 000
5 . 000
44.327 Ret 1.f> 18
4 . 000
43.046 Ret 1.272 3 . 000
2 . 000
1 . 000
0.000
39.000
38 .000
37.000
36.000
35.000
30 Dec7 14 21
Chart created b y Dynamic Trader (c) 1 996-2001
LEN did a fourth thrust up, and is now pulling back. It is getting very close
to the moving average. Was this fourth peak another area that I might have
considered taking some profits? Again, yes. For my trading, I want to trai l a
stop on some of my trade, to let it run, if possible. As I 've mentioned, I
combine profit targets and trailing stops, and usually do multiple scaled
exits.
37
I ' ll add in one more price bar of data, and assess. See figure 3 . 1 8.
Figure 3 . 1 8
:::.-:: LEN 60-1 'f;'!' � 1!113 EJ
8 , 000
7.000
6. 000
5 . 000
44.327 Ret 1.&13
4 . 000
43,046 Ret 1.272 3 . 000
2 . 000
1 . 000
0.000
39,000
38 .000
37.000
36. 000
35 .000
30 Dec7 14 21
Right now LEN has penetrated the moving average, but the close, which is
hard to see, is just a fraction above the average. In this case, if I were strict, I
would not exit the trade yet. Some traders might prefer to use the technique
with the stop as any price cross of the average. I feel that is a perfectly
legitimate choice.
I prefer to wait for a close (unless the price has driven through the average
hard, then I sometimes exit), but that's my preference. I make that choice, in
part, to attempt to prevent being shaken out by ' noise ' .
38
Let's add in some more data, and see if the exit is imminent for this trade.
See figure 3 . 1 9.
Figure 3 . 1 9
?:. LEN 60-1 l!!81 l!1
8 . 000
7 . 000
6. 000
5 . 000
44.327 �:et 1.& 18
4 . 000
43 .046 Ret 1 .272 3 . 000
2 . 000
1 . 000
0.000
39 .000
38 .000
37 .000
36. 000
35.000
30 Dec7 14 21 213
Hmm, it looks like LEN is going to do another thrust up. If I were in this
trade here I would be thinking that LEN might be beginning to weaken,
since it did hit the average, and it hadn't done that before. I might be
thinking about scaling out of yet another small part of the trade here, if the
thrust weakens.
39
I ' ll add more data, and reassess. See figure 3 .20.
Fig u re 3.20
'
�-:. LEN 60-' I!!I3 £JI
7.000
6.000
5 . 000
-----f.!-or.-r-- 44.327 Ret 1.b 18
4 . 000
-----f--'W--:f- 43.046 Ret 1.272 3 . 000
2.000
1 . 000
0.000
39.000
38 . 000
37 .000
36.000
35 .000
30 Dec7 14 21 28
Chart created by Dynamic Tr ader (c) 1996-200 1
That's it; the exit trigger is hit. When LEN tried three times to get over that
area at around $48.50 and failed, and then that expansion bar down started to
form, it was pretty clear what was likely to happen. I don't tend to ' second
guess' the price action and jump early, but this one had a lot of waming
signals.
For comparative purposes, I ' ll record the exit price as the close of this last
price bar, at $46.80. Recall from before, using the 5-period average on the
daily chart had an exit price of $46.82. Sometimes the exit triggers aren't
that close, but many times they are. In my experience I feel that, more often
than not, I get a better exit using the lower timeframe.
40
I ' l l add in some more data, and show what LEN did j ust after this exit
trigger. See figure 3 .2 1 .
Fig u re 3.2 1
8 . 000
7 . 000
6 . 000
5 . 000
44.327 Ret 1.& 18
4 . 000
43.046 Ret 1 .272 3.000
2 . 000
1 . 000
0.000
39 .000
38 .000
37 .000
36 .000
35 .000
30 Dec7 14 21 28
The exit trigger did exactly what I had asked for. It didn't trigger me out on
the smaller pullbacks, but triggered as soon as a larger scale pullback came
into play.
Now, what have we done here? Wel l, we have learned that you can utilize
this moving average cross trailing stop method on the traded timeframe,
using a short period moving average, to attempt to catch a move that
essentially doesn't pullback very much during the move. We have also
learned that you can use the larger timeframe to determine a reasonable
choice for a moving average on a lower timeframe, and attempt to achieve
nearly the same results by riding out the smaller pullbacks on that lower
timeframe.
And now, I want to expand the l ast concept to what I have been calling my
traded timeframe in this LEN example, the daily. When I highlighted the
41
large trend in S back in figure 2.4, I mentioned that perhaps a trader was
trying to catch most of that move because the move might have been based
on the weekly timeframe. I n that case, then, the weekly becomes the traded
timeframe, and the daily the lower timeframe. Hence, sitting through all the
smaller pullbacks on the daily chart perhaps makes sense in the overall
context of that particular trader' s plan.
So I propose to use a longer period moving average on the daily chart in the
LEN example and see what happens. Keep in mind, we are not just putting
that average on any old chart and seeing if anything interesting happens. I
have chosen LEN as an example here because I felt that this window of time
we have been exploring had a weekly trade opportunity, as well as multiple
daily and 60-minute opportunities. I f I didn't see a potential weekly trade
possibility, I wouldn't use this example for this demonstration.
We'll assume, then, as we have on all the examples so far, that a trader has
an acceptable reason to be in a trade on this dai ly chart (as far as their own
individual game plan), in the context of a weekly traded timeframe. In my
opinion, and this is one of my main Kane Trading philosophies, without
context, you have nothing.
42
Let's go back to the daily chart on LEN. I will show the beginning area of
the trade, keeping in mind that the traded timeframe is now the weekly chart.
See figure 3 .22.
Fig u re 3.22
�W1�lt
?: LEN D·D I!!EI £'I
f 8 . 000
t
6.000
)1 ill
" P revi o u s e x a m p l e 4 . 000
d a i l y e x it area
2 . 000
1 0.000
t
1f �t+f
38 .000
P revi o u s e x a m p l e
d a i ly entry area
1
36 . 000
" 34 .000
.
We e k l y e nt ry area
32 .000
21 28 Oct 12 1'l 2& Nov 'l 1& 23 30 Dec 14 21 28 Jan 1 1 18 25 Feb 8

The assumption here is that the trader wants to ride out the smaller pullbacks
of this uptrend on the daily chart, just as we rode out the smaller pullbacks
on the 60-minute chart. The two pullbacks that were used for entry and exit
on the previous example in LEN are labeled on the chart for reference.
These are the exact type of pullbacks that this weekly trader wants to ride
out.
The next step would be to get an appropriate moving average on the chart to
use as a trailing stop. My normal method, as previously described, is to find
the ratio of the two timeframes, and multiply that by the average you find
most appropriate for the larger timeframe. In this case, the ratio is five to
one, since there are five days per week. But would we just use the same 5-
period moving average on the weekly traded timeframe?
43
Not necessarily. I experiment with the issue on that timeframe and decide
what seems to work best, up to that point in time. That is no guarantee, of
course, that the choice I have made will be the best choice for the future. I
have to do the best that I can to make a decision with the data that I have. In
this case, I feel that the 5-period moving average is a little too short for LEN
on the weekly. To avoid the feeling that I am adjusting my examples so that
they work out the best, though, let' s stick with the 5-period average, for
now.
That would lead me towards a 25-period average for the daily, in order to
not get bounced out by the smaller swings. In my experience, I use the 34-
period mostly commonly, and I sometimes go up as high as a 40-period.
Anything shorter than about a 34-period and I find that the largest of the
swings that I want to ride out will knock me out of the trade when I sti ll
want to be in. I ' m pointing this out here because there is a discrepancy
between simply doing the calculation of the approximately equal average,
and what makes sense based on my experience.
Remember, I said find what works on the traded timeframe and convert that
to a longer period, approximate average that you can use on the lower
timeframe. We would need to examine and analyze the weekly chart on
LEN, and decide what we think works best for that timeframe. Just because
we may have felt that a 5-period works best for LEN on the daily at that
time, and that the 5-period is my particular favorite starting point, doesn 't
mean that it is the best for LEN on a weekly chart.
I ' ll do the example with the 25 -period moving average, but I think a 6 or 7-
period average is best for the weekly, and that falls in much closer with my
preferred 34-period starting point on the lower timeframe. Given that I
usual ly have a three to fivefold variation in my timeframes, one could
conclude that my averages for the lower timeframe, if I start with a 5-period,
would be 1 5 to 25-period.
Sometimes this is what I use, but sometimes it is way too ' fast' . What I ' m
trying to convey here is that these are starting points, and I work from there.
I try to see what appears to work best for the particular issue, in the
timeframe that I am looking at. I very frequently have to go up in period
length more than j ust the amount the timeframe change would imply.
44
Let's look at the same chart as in figure 3 .22, but with the 25-period simple
moving average on the chart. See figure 3 .2 3 .
Figure 3.23
�W1�jj
t 8 . 000
6. 000
4 . 000
{)II!
t{
2 . 000
1
0.000
t
ftrjhJ\ �l+f J
38 . 000
r;;;. Previ o u s e x a m p l e
d a i l y e nt ry area
36.000
r;;;. 34 .000
32 .000
21 28 Oct 12 19 26 Nov 9 16 23 30 Dec 14 21 28 Jan 11 18 25 Feb 8

This looks extraordinarily l ike the 60-minute example to me. The price
action is well away from the moving average, and the last pullback ended
quite a bit above the average. The trader looked to enter on the first larger
pullback in this trend, j ust as the daily chart trader did. There are two clear
larger thrusts, and the trader is in on the second thrust. The first thrust was a
lot shorter in price duration than the second thrust at this point. This doesn't
necessarily imply that the second thrust is getting ready to end, but it is one
factor a trader should weigh into the mix.
45
At this point, the weekly trader is now going to ride this until an exit trigger
signal is given, just as was done on the 60-minute example. I ' l l move this
one ahead quite a bit, and we' l l reassess. See figure 3 .24.
Figu re 3.24
?. LEN 0 -0 !IS £J
35 .000
"
We e k l y e nt ry a re a
21 28 Oct 12 19 2& Nov '3 1 & 2 3 3 0 Dec 1 4 2 1 2 3 Jan 1 1 18 2 5 Feb S
LEN is still i n an uptrend here. After setting another new high for the move,
it has pulled back to just above the average, and has started back up. There
hasn 't been any threat to the trail ing stop yet, based on thi s average.
46
We ' ll move forward three more price bars, and reassess. See figure 3 .2 5 .
Fig u re 3.25
/t11i
::.-:: LEN 0 -0 I!!B £Jl
5 . 000
Jf� it
�� It �+
0.000
f
}IJ{J U
5 . 000
0 . 000
" P revi o u s e x a m p l e
35 . 000
"
21 28 0ct 12 19 2& Nov 9 16 23 30 Dec 14 21 28 Jan 11 18 25 Feb B 15

LEN has triggered an exit with this last price bar close below the moving
average. Given how hard LEN plunged below the average, it is likely that I
would have at least examined an exit before waiting for the price bar to
actually close. For comparison purposes, the trigger bar's closing price is
$52.50.
At this point I am wondering if this isn't a shake out, brought about by using
what I considered, at first, to be too short of a moving average (the 25-
period) for this type of trailing stop. Now, am I saying this because, with the
benefit of hindsight, I know how this example is going to play out? It's true,
all my examples are past history, and I have chosen them to demonstrate
certain points. On the other hand, though, there are clues in this case that I
am taking note of that are clear on this chart, as it is presented right now.
To expound upon this, I must refer to one of my other books, Kane Trading
on: Trading ABeD Patterns. In that book I cover, in great detail, the 'two-
47
step' ABeD pattern. One of the main ways I present the pattern is as a
correction to an existing trend. The book lays out the specific criteria I prefer
for that type of trade. The correction that LEN is undergoing at this point on
the chart in figure 3 .25 is a very good setup of the . 786 alternate ABeD
pattern.
With the close on the last bar so far off of the bottom of the bar, this could
imply that the pattern is going to hold, and another leg up could be starting.
Since the ABeD pattern in this context (as outlined in Kane Trading on:
Trading ABeD Patterns) is one of my favorite ways to trade, I am always on
the lookout for it to develop whenever I am watching a strong trend. If I saw
what is on this last chart as a stand-alone chart, without regard to what we
are studying right now, I would be setting up a potential trade area.
I would then be looking to assess the trade potential for a long trade off of
that area, and I would weigh this information into any exit strategy for a
current long trade. I n my own trading, I would sure think twice before
exiting a long trade if I were seeing a long entry signal right at that same
point. This is not ' after-poker' here. The potential formation of an ABeD
pattern is clear here as soon as LEN moves up, fails to set a new high for the
move, and then turns back down, as it has done in figure 3 .25.
The reader is referred to Kane Trading on: Trading ABeD Patterns if the
specifics of trading ABeD patterns are of interest. My point is, I think LEN
is setting up for another leg up here, and the 25-period moving average
trailing stop is, as I originally suspected, too short in period.
48
Let's take a look at where LEN went from here. See figure 3 .26.
Figure 3.26
;:. LEN 0-0 !lEI £I
"'- P revi o u s e x a m p l e
35 ,000
"'-
21 28 Oct 12 19 26 Nov 9 16 23 30 Dec 14 2 1 28 Jan 1 1 18 25 Feb 8 15 22 M

LEN did respond to the area of the alternate ABeD pattern, and did another
thrust up. Right now, I want to add a 34-period simple moving average onto
the chart. I ' l l retain the original 25-period average on the chart, for
comparative purposes.
49
Let's see what this 34-period average would have indicated at the exit point
generated by 25-period average. See figure 3 .27.
Fig u re 3.27
21 28 0ct 12 19 26 Nov ':l 1f, 23 30 Dec 14 2 1 28 Jan 1 1 18 25 Feb 8 15 22 I'll

The 34-period average would have kept the trader in the trade through the
alternate ABeD correction. The price j ust barely penetrated the 34-period
average, and then turned and set a new high for the move. With hindsight, it
seems like this would have been a better choice for this specific trade. Will it
always be a better choice?
There is no way to know what the best choice for a future event will be. I
look at how the issue has been behaving, and I make what I hope i s the best
choice that I can, given what I can see right before me. Sometimes this will
work out to be the best possible choice of all the choices I had at hand, and
sometimes it will not be the best. The skill, I feel, is to make the best choice,
given what you have to work with.
50
I ' ll add in a bit more data on the chart, and we' l l reassess what is happening,
with respect to both of the averages. See figure 3 .28.
Figure 3.28
?: LEN 0-0 II!!IEI £J
5 , 000
0 , 000
5 , 000
35 ,000
"
W e e k l y e nt ry area
Oct Nov Dec 02 Feb M.ar

That's interesting. The price action in LEN has triggered an exit now using
either of the moving averages. As can plainly be seen on the chart, the
difference between the two averages is fairly small. It does seem as though
the 34-period represents the price action better, given the goal of riding out
the smaller pullbacks.
My experience, though, is that ABCD type corrections wil l usually be a little

bit larger in scope than what I consider a ' smal l ' pullback. Hence, in general,
for a trade such as we have been discussing, I would actually want to be
knocked out if the move is on the order of an average ABCD correction in a
trend. In fact, if the ABCD I pointed out had been a ' standard' ABCD,
where AB=CD, it would have carried the price action well below the 3 4-
period average, triggering an exit.
51
Let' s compare some prices on exits, and see what we come up with. The exit
using the 25 -period average was triggered at $52.50. Using the 34-period
average the exit was triggered at $54.5 5 . The high price for this move, so
far, is $60.24. A l ittle discussion is in order. The exit would have been better
by $2.05 using the longer period average, and a trader would also have had
an opportunity to scale out of some of the position as LEN approached the
$60.24 high.
The downside with a longer period average is that it is ' slower' to respond,
and hence the amount the trader 'gives back' before the average is crossed is
frequently larger than the amount using the shorter period average. Traders
need to experiment and decide for themselves what works best for them, and
how they want to balance the pros and cons of different period length
choices, according to their own specific 'Trading Plan ' goals.
For my own trading, I ' m usually pretty close to the 34-period average on
most trades of the type that we have been examining. On the other hand,
though, I find that when I very short-term trade, for example in the ES or
NQ e-minis using a 1 , 3 and I 3-minute chart combination (where the ratio of
timeframes is 3 to 1 , and 4.3 to 1 ), I frequently use a 2 1 or 25-period
average.
52
I ' ll add in a few months of data to the LEN chart so we can see if this exit
trigger did, in fact, point to the end of the trend that we were trying to
capture. See figure 3 .29.
Fig u re 3.29
M
?. l E N [)-[) !IS £J
/\ ��Itrh--�
0.000
5 . 000
��
Alt L /
�
0.000
�a i I Y e xil a r e a
5 . 000
p s example
0.000
..,.,...tI:m;---W'� PrevI o u s e x a m p l e
35 .000
'"
Wee k l y entry a r e a
Nov Dec 02 Feb Mar Apr May Jun
Chart created by D')"namic Trader (c) 1 996-2001
LEN went into range trading, or ' chop mode' as I like to call it, right after
the exit trigger. The choice of either moving average did a very good j ob at
meeting the stated objective of catching and staying with the trend, and
riding out the smaller pullbacks. When the 25-period average triggered an
exit on that alternate ABCD pattern, it was just ' doing its j ob ' .
There was no way to know if that ABCD move down, which was becoming
greater in scope than the average ' small ' pullback, was going to be the start
of a new downtrend. The trail ing stop is designed not to ask questions, but to
just trigger an exit if the price action exceeds that which the trader chose the
average for.
It' s important to keep the proper context for what we have j ust seen here.
Keeping in mind that the discussion of prices here is for the sake of the
53
example, and knowing that I ' m not suggesting that anyone could, or did, get
actual fills at these exact prices, let's look at the overall picture. Going back
to the chart, the potential trade area our weekly trader was looking at for
entry was in the area of $3 5 . One average triggered an exit at $52.50, and
one at $54.55.
Given the starting point of the trade, both averages did a fantastic j ob. Sure,
the 34-period kept the trader in longer, but if the trade had played out
differently the 25-period very wel l may have netted the trader a better profit.
I try not to get too caught up in the somewhat minor differences between the
choices. I try to keep my focus on applying the technique.
I encourage the reader, though, to experiment with as many possibilities and

variations as can be thought up. In this chapter I focused on simple moving
averages. What about exponential moving averages? Or weighted moving
averages? Or any of the ' new generation' moving averages (such as
volatil ity sensitive averages) that respond in a multitude of ways?
I also looked at the trigger as being the first price bar to close after crossing
the moving average. What about simple price crosses versus bar closes? Or
taking out bar highs or lows once an average is crossed? The list is endless. I
have done many experiments, myself, to find what I like for my trading. For
me, I have found simple is best. Each trader must find what works best for
him or her.
When I get to the last chapter on scaled exits, I will present examples with
many aspects that are simi lar to this example in LEN. I will show a variation
of the moving average cross trailing stop that I use quite frequently to help
me scale out of positions, using trailing stops simultaneously on two
timeframes. This combination, although a bit more advanced, is one of my
favorite and most commonly used variations on this technique.
1 ' m going to move on now to moving average crossover triggers. A lot of

groundwork has been laid in this rather extensive chapter on moving average
cross exits. A lot of this groundwork is universal among all the techniques,
and will allow me to be somewhat less detailed in my presentation of the
techniques that fol low, as well as in my development of the examples. I feel
that these techniques are best learned by seeing the process ' in action' , with
multiple examples. Although I will still be detailed and thorough, I will shift
my focus to showing the techniques on the charts.
54
Chapter 4
Moving Average Crossover
The title of this chapter, ' Moving Average Crossover' , sounds very similar
to the title of the last chapter, 'Moving Average Cross' . As we saw in the
last chapter, the actual trigger there was a price cross of the moving average.
In this chapter, two moving averages are going to be used, and the trigger
wil l be when the shorter period moving average crosses the longer period
movmg average.
This technique bears very l ittle resemblance to the so-called ' moving
average crossover system' , despite the title. The reader is referred to Kane
Trading on: Entry Techniques for a very detailed explanation on the
differences between the ' moving average crossover system' that is so widely
popularized, and the Kane Trading approach to the use of moving average
crossovers. If you have distaste for any ' system' using moving average
crossovers, and I don't blame you if you do, have no fear, for my use of
moving average crossovers is totally different (and I never use ' systems').
The setup for the use of this technique is identical to the examples from the
last chapter. The only difference now is that I will be using two moving
averages for my trigger, and keying on how they are relating to each other.
As with the last chapter, the ' art' of this i s in choosing the best variations to
use for the averages, for your own particular trading style and goals. I will
present what I most commonly use, and what I l ike best, but each individual
trader must find out what he or she likes best for his or her own trading.
Before I continue, though, I want to make a few points. This technique is,
perhaps, my least favorite of my trailing stops techniques. I am going to
present it here not because I feel it is so worthwhile that it simply can't be
skipped, but because I want the readers to have the opportunity to decide for
themselves if there is value in it,jor them. I can only say that I don't use it
very often in my trading, because I prefer some of the other techniques.
I also want to explain that when I use this technique, if the occasion arises
that I have made the choice to use it, I prefer to use it for catching trends
where I plan to ride out the ' smaller' pullbacks, as demonstrated in the last
chapter on the moving average cross technique. I don't use the crossover
55
technique to take me out of trades where I am trying to maximize my trade
on one 'thrust' , and get out before any pullback gets going very far.
For that type of play, I find the simple technique of using a short period
simple moving average cross to be more effective for my trading than any
moving average crossover variation that I have been able to find. Hence, I
will present the crossover technique only in the context of trying to remain
in a trend through the smaller pullbacks. If your game plan does not have
you riding out the pullbacks you can move down to a lower timeframe, the
same as was done in the last chapter, and apply the technique on that lower
timeframe.
The reader is also encouraged to experiment and see if the crossover

technique can be of value for trying to capture moves without riding out the
smaller pullbacks on the traded timeframe. Just because I don't use that
variation, and won't present it here, that's no reason not to experiment with
it, to see of it can be of help to you.
56
Let's go back to the example in LEN. I 'l l show figure 3 .9 again here, to
refresh our memories on this one. See figure 4. 1 .
Figu re 4 . 1
?: LEN D-D 1!13 E'1
---+--+---- 44.327 Ret 1.6 13
---h'--- 43.046 Ret 1 .272
38.000
1
36.000
34 .000
26 Nov '3 16 23 30 Dec 14 21 28

The move that we tried to capture was from an entry in the area of the arrow,
until the trend ended, without enduring any pullbacks. The trail ing stop exit
trigger was a cross below the simple 5-period moving average. The dai ly
timeframe, shown in this chart, is the traded timeframe.
We also studied this same trade on a lower timeframe, the 60-minute chart.
In that case, we were willing to sit through ' smaller' pullbacks, but wanted
to be triggered out if the pul lback was greater in scope than the average
' small' pullback. Studying the issue and how it behaves should give you a
good feel for what average pullbacks are like and how much they retrace,
and a feel for what more extensive pullbacks are like, and how much they
usually retrace.
The decision was made to analyze the example on the 60-minute timeframe
with a 34-period simple moving average cross exit trigger. I am reviewing
57
this here so we will be able to make ready comparisons with what we did
with the cross technique and what we are doing with the crossover technique
that I will present here. Let's look, again, at the 34-period cross exit trigger
chart of LEN, on the 60-minute timeframe. This chart was shown as figure
3 .20, in the last chapter. See figure 4.2.
Fig u re 4.2
::''1. LEN 60-1 1!13 E'J
8 . 000
7 . 000
6 . 000
5 . 000
44.327 Ret 1.6 13
4 . 000
43.046 Ret 1 .272 3 . 000
2 . 000
1 . 000
0.000
39. 000
38.000
37 .000
36 .000
35 .000
30 Dec7 14 21 28
We now have a clear picture of a very specific move that we are trying to
capture. We were able to capture a substantial amount of that move using the
5-period simple moving average on the daily, traded timeframe. We also did
a pretty fair j ob using the 34-period simple moving average on the lower
timeframe, in this case the 60-minute timeframe. Now we will see what
happens with this very same move, but using the crossover technique for an
exit trigger instead.
Recall that I said that, for the most part, I only use the crossover technique
when I plan to ride out the smaller pullbacks. Hence, in this trade I would
have to use the 60-minute time frame chart to manage the trade, as that's the
time frame that shows the smal ler pullbacks in the move that we are looking
58
at. I will now add in my first choice for the two moving averages. This
choice is based partially on my preferred starting point, and partially on my
study of the price action in LEN, up until the time the trade could have been
considered.
I ' m going to start with an 8-period simple moving average and a 25-period
simple moving average, both calculated using closing prices. (For those
readers who have read Kane Trading on: Entry Techniques, you know that
when using crossovers for entry, one of my two favorite variations uses a
combination of an exponential moving average and a simple moving
average, with the shorter period average being the exponential average. I
chose that combination because it was one of the choices that seemed to
work best/or my trading. I have found that this exponential/simple
combination also works well for one of my trailing stop crossover variations,
albeit with different period lengths than I use for entries. I will use the
simple/simple combination in this first example, and the exponential/simple
combination for the second example.)
59
I'll add the 8/25 averages onto the 60-minute chart, and we'll see how the
exit trigger unfolds. See figure 4.3 .
Figure 4.3
?. lEN 60-1 ' ' !lEI £i
8 . 000
7 . 000
6 . 000
5 . 000
44.327 f;:et 1.618
4 . 000
43.046 Ret 1.272 3 . 000
2 . 000
1 . 000
0 . 000
39 . 000
38 . 000
37 . 000
36. 000
35 .000
30 Dec7 14 21 28
I 've tried to show the chart as much l ike figure 4.2 as possible, for
comparison purposes. At this point, though, there are a lot of l ines on the
chart that we don't need, so I 'm going to delete some things off of the chart
before we continue on. I ' ll get rid of the external retracement lines, and the
lines highlighting the thrusts. I'll also zoom in a bit, since the move that we
are focusing on started in the December 1 0- 1 2 area, and we no longer need
the additional context to analyze our exit trigger. See figure 4.4.
60
Figu re 4.4
?. LEN 60-1 1![;1 £J
8 , 000
7 , 000
6, 000
5 , 000
4 , 000
3 , 000
2 , 000
1 , 000
0 , 000
39,000
Dec10m 1 1t 12w 13t 14f Dec 17m 18t 1 �w 20t 2 1f DecZlltffl 27t 28f D,
That view is a lot better for our studies. It' s hard to differentiate on the chart,
but the shorter period moving average has not yet crossed below the longer
period average. The exit would have already been triggered with the 34-
period simple moving average cross technique. That exit was triggered on
the second to last bar on this chart, the expansion bar down. Even the extra
time from an additional bar, though, didn't bring the crossover of the
movmg averages.
LEN has also slightly exceeded the previous swing-low from the trend.
Notice, too, that the exceeding of that swing-low came after LEN ' double
topped' , right to the penny, at $48.46. Regardless of the exit strategy chosen
for this trade, the red l ights and warning bells are flashing and screaming to
be ready right here. In my opinion, LEN is at that critical juncture where the
buyers are going to come in or they aren't, but I expect that something i s
going to happen.
The price can't drop any lower without it changing from sideways to down
price action. If LEN starts up strong here this less sensitive exit trigger will
still have me in the trade. And if LEN goes down any further I ' d want to be
61
out (even if LEN then resumes the uptrend, because my plan here is to only
ride out the smaller pullbacks), and the moving averages are on the verge of
a crossover.
Let's look, first, at a closer view of the potential exit area, to see the
relationship of the averages to each other that we can't see very wel l on the
current chart. Then we' l l move on, and see how this trigger plays out. See
figure 4.5.
Figu re 4.5
Jll
8 , 500
/��
8 , 000
tt I 1 j )
7 , 500
1 / -----
-...,.-�
.
./
7 , 000
lp �
./
)1
J
6, 500
/ i t
6, 000
//
5 , 500
/
5 , 000
I
/'
II
4 , 500
4 , 000
/
19w 20( 2 1f Dec24m 2E.w 27( 28f Dec:
It's quite clear on this chart that the averages have not crossed yet. Notice,
too, not only on this chart but also on the l ast chart, how the 8-period wil l
come right in to the 25-period, and then tum. This ' squeeze' is common, in
my experience, when the averages are wel l chosen for the particular issue.
When the ' squeeze' fai ls and becomes a crossover, the pri ce action behavior
has changed and, in my experience, the move is frequently over.
As a small aside, I see this ' failed squeeze' crossover happen many times
when a new high is either nominal, or ' failed' (as in this l ast chart), and the
62
price action has a sideways look to it in the close-up view. You see a
' squeeze' , a nominal new high, and then the shorter period average starts
back down. This alerts me to expect a possible failure in the trend move. Just
a little thing that I want to point out that I watch out for.
Let's continue on. I ' ll add in one more price bar, and then we' l l evaluate.
See figure 4.6.
Figu re 4.6
19w 20t 2 1f Dec24m 2Gw 27t 28f Dec311

The averages still haven't crossed, and the exit hasn't triggered. Notice that
the price action, in the very short term, is bouncing, and this will have the
effect of slowing, or even reversing, the shorter period moving average. If
the price action doesn't reverse back down fairly quickly here, a crossover
becomes less likely, and another ' squeeze' will take place.
63
I ' l l add in one more price bar, and make an assessment. See figure 4.7.
Figure 4.7
)llJrt 1
ftI
jif
", 7---
�_ .�/ ...,....
------f-
//
l)p
)1 / //{r
//
HI
/'
f
19w
/20t 21F Dec24m 2E.w 27t 2SF Dec31m
The next price bar did bring a crossover, despite its slightly higher close.
The slightly upward price action was not enough to slow the average as
much as would have been needed to prevent a crossover. The exit would be
triggered at this point. For the sake of comparison, the exit price is $47.42,
the closing price of the bar that form ed right after the crossover.
When you watch this happen in ' real-time' , you may see the crossover form
and 'uncross' many times. This is because the calculations for the averages
are using the closing price, but until a bar is finalized, the ' closing price' i s
generally the last traded price. For this reason, unless the price is
accelerating through the area, or doing some other unusual action, I wait
until the price bar closes before I accept a crossover.
I ' ve seen these temporary crossovers sometimes called 'phantom

crossovers' . Once the price bar completes, though, the final value for the
calculation i s in, and that crossover is final. The shorter period average may
64
re-cross right back, but nothing can undo the initial crossover, once the price
bar is ' closed' .
With all that said, let's finish our exit trigger price comparison. Recall that
using the 5-period average on the daily, the exit trigger was at $46.82, and
for the 34-period average on the 60-minute time frame , $46.80. Hence, in this
case, the exit trigger price of $47.42 was a better price than either of the two
previous methods. This will not always be the case. Sometimes this method
will yield a better price, and sometimes it won't.
Generally, the times it yields a more favorable exit are the times when the
i ssue bounces just before the crossover completes. This leads to a crossover
forming when the i ssue is actually temporarily moving in the opposite
direction of the crossover formation. This can happen quite frequently, and I
personally doubt it is a coincidence. On the other hand, though, if the issue
plunges through the area where a potential crossover is forming, and you
wait for the close of the bar that forms the crossover, you may give back
more than you want to. This is where I use my judgment on whether to wait,
or exit on the rapid price action.
What I am trying to make clear here is how relatively common it is for an

issue to give a trader a better price with the crossover technique than with
the cross technique, even though the crossover technique is, generally, a
' less-sensitive' technique. This is due, I believe, to the 'bounce' tendency in
the area of the forming crossover that I spoke about. The downside to using
the technique for this advantage is that when there is no bounce, you usually
get a worse price than with the cross technique. As I mentioned, I generally
just stick with the cross technique for my trading.
65
Let's look at the price action in LEN shortly after the exit trigger, and see
how it played out. See figure 4.8.
Figu re 4.8
19w 20t 21F Dec24m2bw 27t 28F Dec31m 2w

The exit trigger using the crossover technique did a very good j ob, in this
case, in meeting the stated goals of catching the move, while riding out the
smaller pullbacks, and getting bounced out on pullbacks of any larger scope.
66
Let's look at one more example, this time an intraday example in the S&P e
mini. 1 ' 11 start with a close up view of an uptrend on a 3-minute chart that
we'll assume a trader has caught, and is now looking to trail a stop, to
attempt to maximize the gain. The traded timeframe is the I 3 -minute chart.
The trader' s plan has him or her sitting through the smaller pullbacks, and
hence the crossover exit technique i s a possible choice. See figure 4.9.
Figure 4.9
::'''1. E S OlZ 3-1 1!!8 £1
1 022 .00
1021.00
1020.00
10 19 .00
10 1 8 . 00
10 1 7.00
10 1 6 . 00
I ' ll add in the second style moving average combination that I mentioned.
I ' ll use an 8-period exponential moving average, and change to a 21-period
simple moving average, using closing prices. I decreased the length of the
simple moving average from 25 to 2 1 here because I feel it works a bit better
with the mini.
I want to make the trigger a little bit more sensitive by choosing the
exponential average for the shorter period line, and decreasing the period for
the longer period l ine. I feel that the short-term intraday mini i s ' quicker'
than LEN was in last example, and with a crossover technique, you don't
67
want a ' slow to cross' choice with an issue that can move through the
averages very quickly.
Could this lead to more false stop outs, though? Yes, and it' s a seeming
paradox that you would choose a more sensitive trigger in an issue that you
feel is more volatile. That's the trade off that I feel I must make many times,
though, in order not to get a late signal, and it' s the reason why I prefer the
simpler moving average cross trail to the crossover in most cases. See figure
4. 1 0.
Fig u re 4. 1 0
I
{I l l L
1 022 , 00
102 1 ,00
I)
1020 , 00
}
1 0 1 9 , 00
/�
i'""'"+-.'---
.. __--'- __------/ 10 1 8 , 00
1 0 1 7 , 00
1 0 1 6 , 00
As expected, the ES is trending up and moving away from the averages.
68
I ' l l add in more data, and we' ll assess how the ES i s behaving with respect
to the averages. See figure 4. 1 1 .
Figu re 4. 1 1
?. E S 032 3-1 !IS £I

1 023,00
1 022,00
1 021 .00
1 020 ,00
1 0 1 9 , 00
1 0 1 8 , 00
1 0 1 7 , 00
1 0 1 6 , 00
23t
The ES is now dropping l ike a rock towards, and slightly through, the longer
2 1 -period average. The last bar, though, has a good-sized lower tail, and has
closed halfway up the bar. This implies that the ES has at least bounced a
little off of the area near the average.
1 ' d l ike to point out here that, for my own trading, when I manage a trade on
the 3-minute ES (the traded timeframe would be the 1 3-minute), and I plan
to ' ride out' the small pullbacks, I frequently use a 2 1 -period average with
the cross technique from the last chapter. I bring this up now, because the
longer period average here i s a 2 1 -period simple moving average, my exit
trigger l ine for the cross technique. Hence, we can also watch this trade from
that perspective, simultaneously.
69
Let's add in one more price bar, and see what is happening. See figure 4. 1 2.
Figure 4. 1 2
1023 .00
1022 . 00
102 1 . 00
1020 .00
1 0 1 9 . 00
1 0 18 . 00
10 1 7 . 00
1 0 1 6 . 00
23t
It sure looks like the mini is going to bounce in here. Now, I can hear many
mini traders saying ' Well, that's crazy. You can't give back three whole
points like that! ' Keep in mind the traded timeframe is the I 3 -minute. We
are simply managing on this lower timeframe so that we can apply the
crossover technique. In the context of the I 3 -minute chart and the trader' s
plan, it is, for this trader, a reasonable amount to 'ride-out' .
70
Let's move on with the example. I ' ll add in a bit more data, and we' l l assess.
See figure 4. 1 3 .
Figure 4.13
::::.. ESOlZ 3-1 !IS £!
1024 .00
1023 . 00
1022 .00
102 1 . 00
1020.00
1 0 19.00
1 0 18 . 00
1 0 17 . 00
1 0 16 . 00
23t
The ES bounced strongly off of the area of that 2 1 -period moving average.
When I see how strongly the ES has moved in thi s last thrust, and the fact
that this is the fourth thrust up in this move, I would now be looking at
taking partial profits. I will expound upon thi s in the last chapter, but suffice
it to say, this chart is screaming at the trader who is playing this as I
described, to start implementing a scaled exit plan.
71
I'll move ahead on the chart, and we' ll eval uate once again. See figure 4. 1 4 .
Figu re 4 . 1 4
P�d {
1 025 . 00
1 024 . 00
1 023 . 00
ll JI��i/ /
1022 . 00
102 1 . 00
11 --.'�
1 020 . 00
ttl
,//
"'--""'-
""""'- /�
....,.. / 1 0 1 9 . 00
If!
1 0 1 8 . 00
1 0 1 7 . 00
1 0 1 6 . 00
23t
The mini is, again, testing the area of the 2 1 -period moving average. All that
can be done now, if one is strictly waiting for the exit trigger, is wait and see
how it plays out. Trading is a lot of waiting. In my experience, it' s almost all
waiting. It's watching and waiting. You wait for entries, and once in, you
wait around to be triggered to exit. That is why, so many times, I have to
move a few bars ahead on these charts, evaluate, and then show another
chart. This is what it looks like, as it unfolds.
72
I ' ll add in some more data, and see what is happening. See figure 4. 1 5 .
/
Figure 4. 1 5
/ II
::''1. ESOaz 3-1 1513 E.I
I lj l)
1025 ,00
II
1024 ,00
/'
trV
1023 ,00
JJ, it H t
1022 ,00
1 021 .00
f�
ltj
1020,00
//�
/-_.. - 1 0 19,00
III
1 0 18 , 00
10 1 7 , 00
1 0 1 6 , 00
231
The ES has set another new high for the move, but it is looking labored,
without that nice, smooth trending look to it. Although I wouldn't
necessarily act on this change in price action, I would weigh that into the
mix, as the ES goes into its fifth thrust.
73
Let's move ahead. See figure 4. 1 6.
Figu re 4 . 1 6
:::'1. ESOlZ 3-1 , ' 1!!1 13 13
�
1025 , 00
1 024 , 00
///"
/"
1 023 , 00
1022 ,00
102 1 ,00
1020 , 00
1 0 1 9 , 00
1 0 1 8 , 00
1 0 1 7 , 00
1 0 1 6 , 00
23t
The ES has now broken below, and closed below, the 2 1 -period average. I
would now exit the trade, based on the moving average cross exit technique,
and my personal parameters. I f the ES continues to break down from here it
would be very unlikely the crossover technique would yield a better price.
But recall how I mentioned that this is the area where bounces frequently
happen, giving the trader a better exit price.
If I were using the crossover technique here I would be very alert and ready
to dump the trade if the ES went down very much further. I wouldn't wait
for the crossover. When I use the crossover technique, I always keep an eye
out for quick moves through the longer period moving average. If I don't see
the 'bounce' I don't wait for the crossover to form, out I go. Traders need to
experiment with this and decide for themselves how they may use it, and
how they will manage such situations.
74
I ' l l add in another price bar, and reassess. See figure 4. 1 7.
Figu re 4.1 7
�� ES03Z 3-1 1!!!IJ3i £I
1025 . 00
/_./ f
1 024 .00
1023.00
1022 .00
1021 .00
1020.00
1 0 1 9 . 00
1 0 1 8 . 00
1 0 17 . 00
1 0 16 . 00
23t
There' s the start of a bounce. A crossover is very close, and the ES is

starting to move up 'right on schedule' . There is no way to know, for sure, if
another thrust up is starting, or if this i s a small bounce, or if that little move
we are looking at is it. It looks to me l ike it would take a large thrust up from
here to prevent a crossover on the next bar.
75
Let me add in one more price bar, and we' ll see if we do get the crossover
exit signal. See figure 4. 1 8.
Figure 4. 1 8
'
?: E 5 03Z 3-1 !Ie £I
)' �I
1025.00
1024 .00
}t
/
1 023 . 00
///
i
.I
�
1 022 .00
\ 1t � H
1 02 1 .00
fl
"'-
- .
�y/
1 020 .00
�'--
l II
1 0 1 9 . 00
" ""____
1 0 1 8 . 00
I
1 0 1 7 . 00
1 0 1 6.00
23t
The ES has set a new low for this pullback, and has generated the crossover.
The exit signal has now been triggered. I ' l l record the exit price as the
closing price of this last bar, 1 023.25. Notice that the exit price, if I had used
my preferred 2 1 -period cross technique, was also 1 023 .25 , from two price
bars earlier. Although the fact that the prices were the same was just
coincidental, it does show how the two techniques are still fairly close in the
exit areas that they point to.
76
1 ' 1 1 add in a bit more data, to show how the ES played out from here, and to
see if the exit area these techniques pointed to was the end of the ' small'
pullbacks. See figure 4. 1 9.
Figu re 4 . 1 9
?: E S OlZ 3-1 B9 £!
\tIl
1 025.00
1 024 .00
// 1 023.00
1
1 022.00
1 02 1 . 00
1 020 . 00
1 0 1 9 . 00
1 0 1 8 . 00
1 0 1 7 . 00
1 0 1 6 . 00
23t
That was it for the ES. The last move down far exceeded the range of a
' smal l ' pullback, and hence I wanted to be 'bounced out ' . The two exit
triggers, in my opinion, did an excellent job at giving a signal right at the
point that the ES changed its trend. No, I don't mean the techniques picked a
top, I mean they triggered near the point where I feel, statistically, the
evidence pointed to the trend being over.
There are many other variations and possibilities that the reader could
investigate and experiment with. I suggest trying different period lengths,
different types of moving averages, and various price bar triggers. This list is
not all-inclusive. I encourage traders to see what they can do with this
somewhat brief look at crossover exit triggers.
77
In the next chapter I will look at regression channels and trendlines. For
certain types of price action, I really l ike these techniques, and find few
better options for my trading.
78
Chapter 5
Regression Channels & Trendlines
Originally, I was going to present these two topics, regression channels and
trendlines, in two separate chapters. As I began to write, I realized that j ust
wasn't going to work. One of the added bonuses of writing about trading is
that it forces one to crystallize his or her thoughts. It is not uncommon to
think you view something a certain way, or that you follow a procedure in a
certain order, only to find out that you are really acting in a different way
when you actually trade.
This is, to an extent, what I discovered when I went to work on this chapter.
I had a battle plan laid out, but realized very quickly that it wasn't quite how
I looked at things in 'real life ' . So I restructured and combined the two
chapters, to more closely follow my thinking and application of the
techniques.
Once a trader gets his or her techniques down, it i s not uncommon, just like
with an athlete, to 'get in the zone' and not think about what you are doing.
If you try to write about your techniques, and explain them, there frequently
can be a big gap between the skill level of your techniques, and the skill
level of your explanation. The writing of this chapter, l ike much of my
writing so far, has really helped me to be consciously aware of exactly what
it is that I am doing.
Now, why is this important for the reader to know? Perhaps it isn't all that
important, as long as I am doing my job in explaining the material in a lucid
and logical manner. For those readers that have read Kane Trading on: Entry
Techniques, you know that I presented trendlines and regression channels as
separate chapters in that book. I feel that my use of them, as far as entry
techniques, fully warranted separate chapters.
I have mentioned that many of the chapter titles from that work will be the
same for this book. I also mentioned that it is mostly a ' coincidence' , and
that the application will be substantially different for the exit triggers, and
not simply the same techniques ' in reverse' . I guess I didn't listen to myself
all that well, since I just assumed that I would do two separate chapters in
this book, just like in the entry techniques book.
79
Only when I started to actually work the examples did I realize that I really
do a lot more of a combination technique when it comes to exits, with a lot
more 'discretion' . This should enforce, for the reader, what I was saying
about the exit strategies not simply being the entry techniques applied to the
other end of the trend. That is what I reinforced for myself, and what I want
the reader to keep in mind. With all that said, let's get on to the techniques.
So far I have applied the techniques that I have presented in two very broad
groups. One group i s the use of the techniques on the traded timeframe,
where I would seek to choose the parameters of the technique such that I
didn't sit through any ' small pullbacks' . The other group, whi ch I appl ied to
a lower timeframe, sought to accomplish approximately the same thing, but
while riding out the small pullbacks.
What I wanted the reader to see was not only how I applied my use of
timeframes, but also how to match the variation of the technique to the move
the trader is hoping to catch. This way, if a trader doesn't want to use
timeframes in the way that I do, he or she can stil l use the technique by
simply learning how to choose the best parameters for what it is he or she is
trying to accomplish. The point is to decide what move you are trying to
catch, and if you are going to ride out the small pullbacks or not.
This was important in the l ast two chapters, so you could decide on the
particular variation and parameters that best suited your needs. In this
chapter, it becomes even more i mportant. With regression channels and
trendlines, as I wil l present them, you'll need the small pullbacks to help
define the l ines. Without them, I find very l ittle use in the techniques. So, by
default, this approach will have the trader riding out the small pullbacks.
What this means to me, and my trading, is that I simply have to take the
move that I plan to trade, decide if it has small pullbacks in it that I am
comfortable riding out, and i f not, I would then drop down to a lower
timeframe, where the pullbacks are acceptable. It would be in that lower
timeframe that I would apply the technique. Again, if you don't use
timeframes as I do, that's fine.
S imply fol low the same procedure that I have just outlined. See if the
prospective move includes ' waves' or is a move between ' waves' , on the
traded timeframe. If there are waves, the technique has what it needs to be
laid out. If there are no waves, i.e. you are playing a single thrust between
80
pullbacks, for example, then drop down to a lower timeframe and use the
'waves' that form on that chart. And how do you know about a prospective
move, and how it may lay out?
All I can say to that is: you' d better know. If you don't know what the issue
you are thinking about trading does, how it behaves, how much a ' smal l '
pullback usually is, how much a ' larger' pullback is, how long an average
trend is, how many ' waves' (thrusts) it does, on average, when trending, and
so on, in my opinion, you shouldn't be trading it. Of course an issue' s past
price action is no guarantee of how the issue wil l trade in the future, but if
past price action has no bearing at all on potential future action, then
technical analysis has no merit.
We are going on the assumption that technical analysis has some value, and
hence an issue' s past behavior can help guide a trader in his or her decisions.
F or me, doing a thorough analysis of how the issue that I am trading
behaves, knowing what it usually does, is critical . I know what my trading
vehicles usually do. This is how I can tell you what a ' smal l ' pullback is, and
when it's too big to be a ' smal l ' pullback. This will vary for each different
issue, and according to my game plan for that particular trade.
81
Let's look at a few brief examples of ' smal l ' , rideable pullbacks, before we
move on. Keep in mind that these are examples that suit my definition and
my 'Trading Plan ' , and are subj ect to the particular trade that I may have had
in mind, as wel l as the particular issue. See figure 5 . 1 .
Fig u re 5. 1
4 . 000
2 . 000
0 . 000
38 . 000
36 .000
34 . 000
32 .000
21 213 Mar 14 21 28 Apr 11 17 25 May 9 16 23 30 Jun

In this example of BBBY, it is pretty clear that there are two noticeable
pullbacks that stand out, marked ' not smal l ' . Between those pullbacks is a
trend that has four noticeable ' small ' pullbacks. I call these ' smal l' because
of the relative size, with respect to what I call a normal pullback in the
context of the overall uptrend.
The two pullbacks marked ' not small ' are what I would think of as ' normal'
pullbacks in the uptrend. The ' smal l ' pullbacks are pullbacks in the lower
timeframe chart. These are the kinds of pullbacks that I want to ride out,
because I am looking at the trend between the two larger pullbacks as the
trend I am focusing on. My traded timeframe could be the weekly in this
case. Hence, for my trading, I might try to take trades between the noticeable
pullbacks on this timeframe.
82
I don't tend to quantify the size of the pullbacks at this phase of the trade. I
simply look at the chart and decide, by eye, what type of pullback I think
each one is. There are techniques to help guide a trader as to what type of
pullback it is, but I prefer to eye them. Eyeing the chart forces me to make
subj ective decisions, and I feel that is the best thing I can do. I really prefer
to not blindly follow indicators (which is why you very rarely see them in
Kane Trading materials), but instead make judgment calls based on my
experience with price action.
F or those readers that like to attempt to quantify things, here are two things I
look at when I ' m in the mood to use technical tools instead of my eye. One
thing that I will have on the chart is my trailing stop moving average, set for
riding out the ' small ' pullbacks. If the period length of the moving average
is well chosen, it will, by definition, keep the trader in through the ' small '
pullbacks, and kick the trader out when the pullbacks exceed ' smal l ' .
There i s one thing that I need to point out, though, that doesn't come up
when using the average as a trailing stop on a successful trade. It takes
awhile for the average to begin to ' represent' the price action well. That is
why averages on the traded timeframe are so poor for entry signals; they are
just too late. Hence, the average can point out pullbacks that are beyond
' small' once the trend has been going for a bit, but have no relevance for
picking out such pullbacks early in the trend.
83
'
Let's look at the BBBY chart with a 25-period simple moving average on
the chart. See figure 5 .2.
Fig u re 5.2
4 , 000
2 , 000
0 , 000
38 ,000
36 , 000
34 ,000
32 ,000
21 28 Mar 14 21 28 Apr 11 17 25 May 9 16 23 30 Jun

Notice how none of the pullbacks marked ' smal l ' even touched the moving
average? Then the second pullback marked ' not small ' exceeded the
average? If this average was chosen well for use as a moving average cross
trailing stop, this is exactly what a trader would want to have happen. We
are now just using this as a guide to show how one can differentiate the
types of pullbacks.
And notice, too, how the first pullback marked ' not small ' is clearly on the
order of the second pullback marked the same way. Yet it didn't penetrate
the average. This is because the average has not yet ' caught up' to the price
action of the trend. The price did come right down and nearly touch that
average, though, before resuming the trend. Although this is ' off topic ' , I do
not feel that this is a coincidence. I see this happen very often when using
averages chosen in the manner that I have chosen this one. The most
84
important consideration is to only use the average as a guidel ine once the
average has begun to represent the price action of the trend.
Another technique that can point to the type of pullback that is unfolding is
the use of some type of oscillator. Since I use ' indicators' very sparingly, I
will choose to demonstrate this with a rather basic stochastic, set to 1 5, 3 , 5 .
Let's look at the chart with this indicator added, and I ' ll explain how I use it.
See figure 5 .3 .
Figure 5.3
?. B B BY D-D ' !IS £I
4 . 000
2 . 000
0.000
38 .000
36.000
34.000
32 . 000
St02::�� ?
��- � �
21 28 Mar 14 21 28 Apr 11 17 25 May '3 16 23 30 Jun
___ ___
,« �<��. 8:��;::>/. <,:<,� <. • �

'...<'
Notice how none of the ' small ' pullbacks pushed the stochastics back down
to the lower band? As soon as the pullback triggered an exit on the moving
average trailing stop line, the stochastics pushed down to the lower band.
This tells me that the pullback is not a ' small' pullback, and is not a pullback
that I want to sit through. It may even be a trend change.
Notice, too, that the first pullback marked 'not small ' did not push the
stochastics down, just as it did not exceed the moving average line. Yet these
two pullbacks are only forty-four cents different in price range for the
85
moves. Why didn't the stochastics drop to the lower band, then, on the first
pullback? This is because the stochastics hadn't ' normalized' to the trend
pace yet, just like the moving average line hadn't.
This doesn't sound very mathematically rigorous, and I ' m doing that on
purpose. I'm trying to give a more holistic view, as opposed to a rigorous
mathematical one. For those that want at least a brief mathematical
explanation (or want to be convinced that I really do know what I am talking
about), I ' ll add this. If you look at the period used for the stochastics, you
can see that it is only using data from after the uptrend actually started. So
the stochastics is representing only the uptrend, and not using data from the
previous downtrend.
But look at the character of the initial thrust of the uptrend. It is very strong
and steep. Now look at the price action right before the second ' not small '
pul lback. This action i s much more slow and steady. It' s slightly uptrending,
and oscillating as it goes up. The first thrust move is not in line with the pace
of the trend after that point. This data is factored into the stochastic
calculation, and it is going to be very hard to overcome.
This is why I don't use the stochastics at all in the early part of a trend,
where the initial action is non-representative of the rest of the action. I try to
trade only ' smooth' trends, where stochastics such as this can be of help to
me in the latter part of the trend. I try to, very basically, trade the trends
between full stochastics dips in a larger scope trend. I ride out the ' small'
pul lbacks, managing the trade on the lower time frame.
Let me attempt to make a point here about ' calling your trend move' .
Perhaps my point i s already clear to all the readers, but maybe it isn't. I ' m
going to risk potentially boring some readers by discussing this a bit more
here, because I feel it is vitally important to understand this concept.
When I point out potential trend moves that I may be focusing on, I am
doing so without the specific explanations of why I would be looking at that
move at that particular time. I am not providing this detail because, as I
previously explained, it is outside the scope of this book. If one were to try
to figure out why I may be looking at the trends that I am pointing out, it
would be from difficult to near impossible to form a decent conclusion, since
I am not specifying anything about the possible reasons behind the interest
in that particular trend move.
86
In fact, some highlighted moves may be chosen totally hypothetically,
representing similar moves that I sometimes attempt to trade. At times in my
trading I look to play a trend move between pullbacks, where I plan and
expect to ride out ' small' pullbacks. Sometimes I am looking to play a thrust
off of a particular area, where I don't want to take hardly any 'heat ' , and
thus I will want to be out as soon as the issue begins to tum around at all.
I attempt to play many different scenarios, on many different timeframes,

depending on what opportunities I see at the time. It' s not possible for me to
simply state that I do this one thing, and that's it. Hence, once I can state
what move I am looking to play in a given trade, and on what timeframe I
want to do my management (all of which is based on my own personal
'Trading Plan'), only then can I choose the appropriate trailing stop
technique, for me, on that particular trade.
This is why it is important for you to come to this discussion with an idea
already in mind for what trends you are trying to play. Then you match them
with the techniques that seem to be best suited for your needs. What is
important to know is what you are trying to do, and what it will look like as
it happens. I can't tell you that for your trading, I can only tel l you that for
my trading. I am j ust trying to avoid having any readers thinking that I
should be telling them, on a given example chart, what trends they should be
trying to trade.
Now you know why I am not even making the slightest mention of that type
of thing. I am showing you different ways trends may play out, and hoping
that I have covered enough of the variations so that some are similar to what
you are trying to do. Hopefully, then, you can make use of the techniques
that I am presenting, either as I present them, or with some modifications.
87
Now that I think it i s very clear what we are doing here, and what we are not
doing, let's move on. I ' ll show one more example of different relative
pul lback sizes in a trend, and then we' ll get on to the techniques. See figure
5 .4.
Figu re 5.4
' '
?:'S OX.X D-D ' I!! B E!
00.00
50.00
00.00
b o r d e rl i n e
IoC n ot 's m a l l ' 50.00
IoC n ot 'sm a l l '
00.00
7'1
's m a l l '
7'1
's m a l l ' 7'1
'sm a l l '
250.00
�-� -
Mar Apr . May Jun Jul Aug Sep Oct Nov
Stoch 15,3,5 (30%·20%)
lID.
_ .;X )':"
Notice how the SOX has, for the most part, two noticeable pullback levels in
this downtrend. The smaller sized pullbacks usually stay away from the 25-
period simple moving average (shown on the chart), and the larger pullbacks
usual ly exceed, and close on the other side of, the average. Also notice that
the smal ler pullbacks rarely push the 1 5 , 3 , 5 stochastics up near the top
band, and that the larger pullbacks do. The borderline pullback, right in the
middle of this downtrend, j ust exceeded the moving average, and got the
stochastics up pretty far, but not to the upper band. The indicator and
average confirm what my eye can easily see; this pullback was right in
between.
I have been drawing a very clear distinction between these two levels of
pullbacks. I am doing thi s because it has served my trading well to do so. I f
88
you do not find this separation beneficial to your own trading, don't make
the distinction. I have found that I can tell a lot about what the trend is
doing, and what it is that I am trying to capitalize on, by viewing the
unfolding situation in this way.
It is necessary for me to continue this protocol in order to present the

techniques. That does not mean that you must follow it once you have the
concepts down. If modifying the way the swings are viewed better suits your
purpose, as long as you can stil l utilize the techniques, then by all means do
it. One of the main things that I always want to convey is to not be rigid.
Instead, be adaptive and flowing. I ' m showing you how I see things. Take
that information and adjust it for you, and your style of trading.
1 ' d l ike to make one more point before we start working with the techniques.
In the last explanation I used the term 'pullback', referring to a correction, or
rally, in a downtrend. Some people do not like to use the term pullback with
reference to retracements in downtrends, preferring the term correction, or
rally. Pullbacks are for retracements in uptrends and rallies are for
retracements in downtrends, they say.
Myself, I feel that a pullback is a pullback, and it refers to a pullback in a

trend, period. The direction of the trend is inconsequential. We all have
heard 'buy the pullback ( or dip)' and ' short the ral ly' . Those may be the
most commonly heard expressions on financial television, but I feel the term
pullback is totally appropriate in either an uptrend or a downtrend. I know
that this is j ust an issue of semantics, but I want it to be clear that my usage
here is intentional.
89
I ' d l ike to start out by looking at an example with a nice, smooth downtrend.
This time I ' ll choose a very short intraday timeframe, a 3 -minute chart. The
assumption i s that the trader has caught this downtrend, and wants to ride
out the ' smal l ' pullbacks, and get bounced out when anything exceeding the
average ' small ' pullback is encountered. This example is in the
electronically traded 3 0-yr bond. See figure 5 . 5 .
Figu re 5.5
109.400
109.300
109. 200
109 . 1 00
1 09.000
108.900
1 08. 800
1 08. 700
108.600
1 08 .500
108. 400
108 . 300
108 .200
The bond is in a really smooth downtrend, with nice, ' smal l ' pullbacks. This
type of action is very amenable to trendlines and regression channels.
90
I ' ll start out by adding on a standard regression channel to the price action of
the downtrend. See figure 5 .6.
Figure 5.6
?. ZBOlZ 3-1 '

!IS EI
1 09. 400
1 09. 300
1 09. 200
1 09. 100
109. 000
108.900
1 08 . 800
108. 700
108.600
108.500
1 08. 400
1 08. 300
1 08.200
The channel does a great job of representing the price action here. Let me
explain what the channel actually does, mathematically. I ' l l try to keep this
as painless as possible. The middle l ine i s the regression l ine. This i s a 'best
fit' l ine, statistically calculated to be the best fitting straight line possible,
using all of the data points.
The outer l ines are the channel l ines, and they are set, in the most common
'default' setting, at two standard deviations. This value, by definition, will
encompass 95% (rounded) of the data points. Most trading software will
allow the user to set the standard deviation number to any setting that is
desired. I rarely stray from the ' default' setting of 2 .0, but, as outlined in
Kane Trading on: Entry Techniques, sometimes I do change it.
Now, the i mportant thing to understand is that 95% of the time the price
action will close inside the channel (I have it set to calculate the channel
91
using the closing prices). If the price pops out of the channel , this can sti ll be
normal and part of the standard behavior of the price, within the constraints
of the channel. As a very rough guideline, though, it could pop out above or
below the channel (making a not-too-mathematically rigorous assumption
that the chances of a pop out on either side is roughly equal), hence the price
will be above the channel only about 2.5% of the time.
The concept, then, is that if the price moves above the channel in this case,
and then the price closes outside of the channel , the odds are seemingly
much greater that a trend change is at hand (or at the very least the current
trend is ending), as opposed to this being part of the approximately 2.5% of
the time that the price is doing this ' normally', and it doesn't imply the
channel is ' failing ' . Notice that the price, so far, has hardly been outside of
the channel at all.
Before we continue on, 1 ' d l ike to note something about price action outside
of the channel l ines. The chart shows 52 bars of data inside the channels. If
5% of the closes, on average, should be outside the channels, that would
imply that 2.6 closes should be outside on this chart. I see one close outside,
and one extremely close, so close that you could call it out if you wanted to.
So although the amount outside the channels seems pretty small, it' s actually
not that far from what is to be expected.
92
Let me move the chart ahead, and we'll assess what is happening. See figure
5.7.
Fig u re 5.7
?. ZB03Z 3-1 I!! I3 f!I

109. 400
109.200
109.000
108. 800
108 . 600
108.400
1 08.200
108 . 000
Chart created by D'inamic Trader (c) 1996-2001
The ZB has now punched outside the bottom of the channel . This can
sometimes be an indication that the trend has exhausted itself. This is by no
means an exhaustive, capitulatory move on the part of the ZB, but one can
see that the last move went from the very top of the channel straight down
and through the bottom of the channel .
When a trend has moved in m y favor for quite awhile and I'm thinking it' s
statistically near an end, and then I see this kind o f behavior, I am usual ly
doing two things. One thing is scaling out of some more of my position on
the break below the channel line. The other thing is getting ready to see a
reversal and a pop over the top channel line.
This doesn't always work, and, in fact, it sometimes indicates growing

weakness and an imminent, greater trend continuation move. But more often
than not, in my experience, it implies the move is over. Regardless, my exit
93
signal is a close above the top channel l ine, and if that happens I ' m going to
exit. I will go into more detail on scaled exits in the last chapter.
One more thing that I want to note here : the regression channel has not been
changed. I did not recalculate the channel based on the newer data that was
added. I f I were to do that, I can tel l you that it would change the channel.
Some of the newer data is outside of the channel. Incorporating this newer
data would cause a widening of the channel lines, and it would slant them
down a bit more.
Some traders like to redo the channel every time new data is added. I prefer
to wait until I am getting close to the average trend move, and then calculate
the channel at the last minute. If I feel that it does a good job with the price
action, I will leave it as it is for the remainder of the trade, or until such time
as I feel it no longer represents the price action. For this example, I wi ll not
recalculate the channel . I ' ll add some more data, and reassess. See figure
5 .8 .
Fig u re 5.8
?. ZB03Z 3-1 , > , ', 158 £1

1 09. 400
109. 200
1 09.000
1 08 .800
94
The ZB has gone kind of flat here. Although it has not done much of this
type of behavior so far in this downtrend, it did have one spot where it went
a bit sideways. It's hard to draw any conclusions at this point on what is
likely to happen. I ' ll add in some more data, and assess the situation. See
figure 5 .9 .
Figure 5.9
�-:: ZB03Z 3-( I!EI £I

1 09. 400
109. 200
109.000
108.800
1 08.600
108. 400
108. 200
108.000
Chart created by D':/namic Trader (c) 1 996-2001
That's it; the ZB has gone straight up, and closed above the upper channel
line. That would trigger my exit using this technique. Notice that the last bar
is a doj i bar with an upper tail . Although I would honor my exit stop at this
point, it does make me wonder if this is a headfake, and if the ZB is going to
reverse right back down and set a new low. Generally, I have found that my
trading suffers when I try to second-guess things like this.
95
Let's take a look at what happened from here with the ZB. See figure 5 . 1 0.
Fig u re 5. 1 0
" , '
;'-1, ZB03Z 3-1 I!IS £J
109.400
109.200
1 09.000
108.800
108. 600
1 08. 400
108.200
108. 000
Wel l, it does look l ike the downtrend remains intact. After the doj i bar the
ZB went up a bit more, and then reversed hard and set a nominal new low by
two ticks.
96
I ' 1 1 add in some more data, and we' 1 1 see what happened. See figure 5 . 1 1 .
Figure 5. 1 1
�'1. ZBOlZ 3-1 I!!EI £J

1 09. 400
1 09. 200
1 09. 000
1 08 .800
i 108.600
r!ff
108.400
1 08.200
108.000
As it turns out, that nominal new low was it. The channel technique worked
great for my purposes. It picked the end of the trend with near perfection.
Notice that I didn't say picked the bottom with near perfection. My exit was
well above the bottom. What the exit trigger did was get me out when the
likelihood of the trend being over was greatly increasing.
Sure, there was some volatility, and a headfake that I didn't stay in for, but
that is not what I am trying to do. The trend was likely over, and I wanted a
trigger to tell me this. The trigger, in this case, was a great choice and it 'did
its job' quite well.
Before we move on and look at some variations, let's do a comparison on

this chart with the moving average cross exit technique. I think you will find
the chart fascinating, and you'll probably do at least a double take on it. I
know I did. I did not choose this example because of what you are about to
see. In fact, what you are about to see, I see on a frequent basis. Let's look at
97
the chart, right at the trigger point, with a 25-period simple moving average
added to the chart. See figure 5 . 1 2.
Figure 5. 1 2
?: ZB 032 3·1 , !!IS £I

1 09. 400
1 09. 200
1 09. 000
108. 800
108 . 600
108 . 400
108 . 200
108 .000
Chart created by Dynamic Trader (c) 1 996·200 1
The moving average line is s imply 'riding' the top channel l ine all the way
down. I find that remarkable. The exit triggers for both techniques were at
the same exact spot. Readers of Kane Trading on: Entry Techniques have
seen many examples of this with the entry triggers. I never ceases to amaze
me how such disparate techniques can track each other so closely.
As an aside, the reason the moving average l ine is coming up from the
middle left of the chart, and then, right as it hits the channel line, starts to
drop and fol low the channel is because there was a large gap up j ust before
the chart begins, and the moving average l ine hadn't adjusted to this yet. The
sharp bend in the l ine, just as it hits the channel l ine, is where the gap is
finally not in the calculation of the average anymore. Funny how that
happened at the exact point that it hit the channel line. Intriguing, but likely
just a coincidence, right?
98
I'm going to investigate the use of a trendline in this same example now,
which should point out some of the reasons why I prefer the use of the
regression channel . Actually, as we will see before the end of this chapter, I
prefer a somewhat 'hybrid' use of the two, with a touch of subjectivity
thrown in. Don't worry, though, it' s not as bad, or as unscientific, as it
sounds.
Let's go back to the chart, just before the way it is shown in figure 5 .5 , and
this time I ' ll add in a trendline. See figure 5 . 1 3 .
Figure 5. 1 3
ij
::;-=. ZB03Z 3-1 I!I3 EJ
tl j
109. 400
109.300
109.200
109 . 1 00
}f l l j ) l j j ) f
109.000
t11tj
108 .900
108 .800
1)1l�tf)
108 .700
j1 1
108 .600
1 08 . 500
I've drawn the trendline from the tops of the first two peaks, which is
proper. The price action has come up to 'test' the trendline, and has turned
back down just shy of the line. So far, everything is going 'textbook' with
regard to the trendline.
99
Let's move ahead a bit, and discuss what we see. See figure 5 . 1 4.
Fig u re 5 . 1 4
�:.. ZB03Z 3-1 I!GJ £I

109. 400
109.300
109 . 200
1 09. 1 00
1 09. 000
108 . 900
108.800
108 .700
108.600
1 08. 500
The price action in the ZB has turned back up, after setting a very nominal
new low. It has now exceeded the trendline, although it has not closed above
it. (As an aside, trendlines can be created using c losing prices, and many
traders use that style. I n this case, that would have created a lower trend line
that would have been violated already, on a closing basis. I don't use this
closing style in creating trendlines for the techniques in this chapter.) This
creates a dilemma for us, though.
Do we now redo the trendline? I pointed out before how I tend not to redo
the regression channel when new data comes in, as long as I felt that the
channel was still doing a good j ob at representing the price action.
Trendlines, though, are commonly redone when new data comes in, and
some traders l ike to keep all the variations they create on the chart 'to get a
feel ' for what is unfolding.
100
Before we redo any trendlines, and make a decision on whether we feel that
redoing them is a good idea or not, let's add some more data in, and see
what is happening with respect to the trendline we already have on the chart.
See figure 5 . 1 5 .
Figure 5. 1 5
Tljl lr
::?1. ZBOlZ l-( < ", ' " < 1I!13 £1
t
109.400
It! 1j
109.300
109.200
lhl Pull lU
1 09. 1 00
T l
1 09.000
l
108.900
]lt1J} IJhl
108. 800
)J
108. 700
108.600
108.500
108.400
108.300
It looks l ike that small amount that the price action exceeded the trendline
was just a 'touch ' , and the trendline is stil l doing quite a good job at
representing the price action. In fact, the price action looks very similar to
what we have seen at times with a moving average, where we saw the price
exceed (but not close on the other side of) the moving average, and then
resume the trend. So far, the trendl ine looks great.
10 1
Let's move ahead a bit. See figure 5 . 1 6.
Figure 5. 1 6
:::-=. ZB03Z 3- 1 ' " , , 1!!113 £I

1 09, 400
1 09, 300
109, 200
1 09, 1 00
109,000
108,900
108 , 800
108 , 700
108,600
108,500
1 08 , 400
108 , 300
Chart created b'i Dynamic Trader (c) 1 996-2001
Now, the trouble is starting. We have a strong pierce over the trendline, and,
again, a close below the line. Remember how I said, with previous
techniques, that when the price rapidly goes through my trigger area that I
frequently at least consider taking the exit before the price bar close
happens? In a case like on this chart, if the price action on the lower
timeframe were j ust straight through and up, I likely would have taken the
exit. It will all prove to be an academic discussion, though, as you will see
when I add in one more price bar. See figure 5 . 1 7.
102
Fig u re 5. 1 7
Tlj! I)
?. ZBOlZ 3-1 eEl £!
t
109.400
lHlj
109.300
]f
109 . 200
j ]l T )l u )l I] l l ]
109. 1 00
109.000
108.900
lI! H } f Jh h J
108.800
108. 700
1 08 . 600
108.500
108. 400
108.300
Now we have a clear exit signal with that close above the trendline. This
looks like a great trade, and a great exit signal. The problem is, we know
what happened, and how the regression channel helped the trader stay in
until the move was over. In this case the exit is quite premature.
103
Let's add in some more data, and I ' l l discuss what we see. See figure 5 . 1 8 .
Figure 5. 1 8
1 09.400
1 09. 200
tll' l
1 09. 000
Htld11hhJ
1 08 .800
108.600
108.400
I
f
t 1 08 . 200
1 08. 000
Right now, if I had used that exit trigger, I would not be patting myself on
the back anymore. In fact, 1'd be quite frustrated. Let me temporarily add
that 25-period simpl e moving average back onto the chart. We' l l see what
that is telling us with respect to the trendline, just to get an idea what has
happened. Then I ' l l comment on what we see. See figure 5 . 1 9.
104
Figure 5. 1 9
1 09.400
109. 200
1 09.000
1 08. 800
108.600
108.400
1 08 . 200
108.000
Remember how the regression channel and the moving average tracked
together? The trendline is tracking the moving average, too, but below it.
That wil l make it ' more sensitive' in a sense, and bounce a trader out sooner.
But that is not necessarily what the trader wants. The trader wants to sit
through the ' smal l ' pullbacks, and the trendl ine exited the trader on a small
pullback.
105
Now, what if we had redone the trendline, to use the new data that came in?
That data was the tops of the price bars that exceeded, but didn't close
above, the trendline back in figure 5 . 1 4. Let's do that. Even though it might
be a little bit confusing, 1 ' 1 1 add in that new trendline, but leave the 'old'
trendline and the moving average. See figure 5 .20.
Figu re 5.20
109. 400
1 09.200
1 09. 000
108.800
1 08. 600
1 08. 400
tlj
108.200
108.000
Although the new trendl ine appears little different than the original
trendl ine, it did angle up just enough such that the price action that triggered
the trader out would no longer trigger an exit. The price bars closed below
the trendline, and the one thrusting bar up didn't exceed the new trendline by
enough to cause me to think about an exit based on rapid price movement.
106
This looks like the answer to the trendline problem. That is, until we see that
we now need to redo the trendline again, based on the new data. Let me add
another trendl ine onto the chart, using this new data. I 'l l leave the lines we
have on the chart in place, so we can see what is happening with respect to
all of the choices. See figure 5 .2 1 .
Figure 5.2 1
::''1. za 032 3-1 158 £I

109.400
1 09. 200
109. 000
108.800
108.600
1 08 . 400
t 11
108. 200
108.000
The upper trendline is now tracking exactly with the moving average. This
looks like a great solution to the 'trendline problem' . The one thing I notice,
though, is that all the data in the middle of the trend no longer touches, or
even gets really close to, the trendline.
Granted that when we use a moving average the data pretty much always
stays away from the average, but that's the nature of the moving average, the
way we have chosen it. This is a trendline. Most books on technical analysis
point out how you want to touch the trendline as many times as possible, to
' strengthen' it. Now we have three trendlines, and it' s hard to evaluate the
status of any one of them.
1 07
Let's move to the exit trigger point that we determined when using the
previous techniques, and see what is happening with the trendlines. See
figure 5 .22.
Figu re 5.22
1 09.400
1 09. 200
1 09. 000
1 08 .800
1 08. 600
108.400
1 08 .200
1 08 . 000
It looks like the last trendline we created i s tracking the moving average
almost perfectly, and has triggered an exit at the same time. I f we look close
up, though, that is not quite what is going on. See figure 5 .23 .
1 08
Figure 5.23
: I _ c, x
1 08.400
1 08. 350
108,300
1 08. 250
1 08 .200
J
108 . 1 50
IJttJ
1 08 . 1 00
I {
1 08 , 050
1 08 , 000
1 07. 950
Even though it is still hard to see on this close-up view of the chart, the last
bar has closed just above the moving average, but not above the trendline.
The trader would still be watching, unless the somewhat rapid price
movement triggered an exit.
109
Let's add on one more price bar to this close-up chart. See figure 5 .24.
Figu re 5.24
108.400
1 08.300
108. 200
1 08 . 1 00
108.000
Regardless of the technique chosen here, or where the bar closes fell, an exit
would have been triggered here. Simply moving that far above the trigger
line in price would get me out. This is a subj ective call, but one, I feel, the
trader must always be on the lookout for.
Although I try to stay very close to the topic at hand in my books, there
occasionally comes a time when a little story can, perhaps, teach a valuable
lesson or two for the readers. I feel that this is one of those times, so I will
digress a bit and tell about a situation that happened in my own trading.
Imagine a situation like on January 3 , 200 1 . I had made two very short-term
daytrades in the NQ that morning, on the short side. I was trading off of the
3-minute chart, using the I -minute chart for entry and exit signals. I saw
what looked like an opportunity arising to go short again. Without getting
into the specifics of the trade methodology, or recreating the exact specifics
of the trade, all of which are unnecessary to this story, I spotted an uptrend
1 10
ending in an area I thought might lead to a short-term reversal, in the context
of the 3-minute and 1 3-minute timeframes.
Let me show a I -minute chart of what I was looking at. I ' ll add on a
regression channel , not because it was necessarily what I was using to
trigger an entry, or because we happen to be working with them in this
chapter, but simply to highlight for the reader the idea that the current
uptrend had ended, and I was looking at a short in here. See figure 5 .25 .
Figure 5.25
2190,00
t
.
2 1 80,00
/ L�ltIJ/
/ 2 1 70,00
l lt tiA /
t1lJ�
2 1 60 , 00
J 2 1 50,00
�
2 1 40,00
f------"- 2 1 30,00
Let me now show a very rough guideline that I l ikely would have been using
on this trade, to show where I thought the price action would be going, and
to point out my approximate exit trigger. Keep in mind, I ' m trying to
recreate this for the reader years later, and I ' m only trying to present the gist
of what I was looking at. See figure 5 .26.
111
Fig u re 5.26
?: N QOI H 1 -1 ' .' " . 1!!18 J!1
2 1 90.00
2 1 80 . 00
2 1 70 . 00
2 1 60.00
2 1 50 . 00
2 1 40 . 00
1------ooL-- 2 1 30 . 00
Just before this point I realized that I had been at it for almost four hours
without a break, and I felt too hungry and exhausted to continue. I decided to
head to the kitchen and make myself a sandwich, and let this trade go by,
despite the fact that I really liked the setup and I felt that it had a good
chance of being a winner.
I walked down the hallway and I passed by the living room as I entered the
kitchen. I had one of the financial networks blaring on the l iving room
television, j ust as I did in the trading room. I heard screams and a ruckus like
I couldn't believe. I thought I must have had the wrong channel on that
television. I walked into the l iving room, and simply couldn't believe the
numbers on the screen. I ran back into my trading room, and this is what I
saw, one minute later. See figure 5 .27.
1 12
Figure 5.27
?: NQ01 H 1 -1 1!! 8 1:'1

2280.00
2260 .00
2240 .00
2220.00
The fed had done a surprise interest rate cut of fifty basis points. First
thought: should a trader wait for the close of this bar to exit a short trade?
Rules are rules, but you have to know what the exceptions are. Imagine
getting your signals by using a computer-generated program that wouldn't
tell you to exit a short trade until this bar closes! Now the reader should have
an idea why I chose to tell this story here. When price action flies through
my stop area, I don't wait around, out I go.
1 13
Let's add one more price bar here. See figure 5 .2 8 .
Figure 5.28
� N Q 01 H 1 -1 �, , 'i'; !lEl l'!!
2550 , 00
2500 , 00
2450 , 00
2400 , 00
2350 , 00
2300 , 00
2250,00
2200 , 00
2 1 50 , 00
This is, without a doubt, the most unbelievable move I have ever witnessed
in my trading career. I ' l l add in one more price bar, and make a few
comments. See figure 5 .29.
1 14
Figure 5.29
?: NQ01 H l-t '

II!! EU!I
2550.00
2500 .00
2450 .00
2400.00
2350.00
2300 .00
2250.00
.. , .L
2200.00
2 1 50 . 00
The NQ had moved a total of approximately 4 1 8 points in j ust over two

minutes, from about 2 1 72 up to 2590. This is over a 1 9% move in a maj or
index, in minutes. It was a mere lucky twist of fate that I wasn't short when
it happened. I generally consider myself not that ' lucky' of a person, but that
attitude changed that day. There is no way to even estimate where I would
have gotten out, had I taken that short trade, but it would have been ugly,
that's for sure.
This is why I refer to maximum risk on a trade as 'theoretical' maximum

risk on a trade. You never know when something like this is right around the
comer, waiting for you. Although events like this are a very rare occurrence,
and theoretically it' s j ust as l ikely to go for you as against you, it must be
factored into your overall ' Trading Plan ' . I hope the readers have benefited
from this little story.
Let me get back on topic here. So what have we concluded with our
trendl ine example? My conclusion is that the trendlines, and the choices we
make on which ones to use, are somewhat arbitrary. They are based on
sometimes as l ittle as two points, and perhaps one of those points is a l ittle
1 15
' out of balance ' with the rest of the price action. This could greatly skew the
placement of the exit area. A regression channel takes all of the price action
into account, as does a moving average. A trendline can take as little as two
end points on two price bars, and act as though it' s the sum of all of the price
action.
Let me show an example where this can point to an area very far away from
the area pointed to by a regression channel or a moving average. I ' ll start
with a I 5-minute chart of FLEX, showing a potential trade area, marked by
an arrow, that a trader may have used to get on board a trend continuation
trade. See figure 5 .30.
Fig u re 5.30
?: FLEX 1 5-1 " , :' ' !Ie 13

1 4 , 800
1 4 . 600
1 4 . 400
1 4 , 200
1 4 , 000
1 3 , 800
1 3 , 600
1 3 . 400
1 3 , 200
3w � Sf SepSm
Although we are strictly focusing on trailing stops in this book, I want to

point out that the area highlighted by the arrow is a great example of an
alternate ABeD pattern in an established uptrend. Let's assume the trader
took a position somewhere in that area, and now wants to trail a stop that
would let him or her ride out the ' small' pullbacks.
1 16
And what would the ' small' pullbacks look like? Look at the trend before
the potential trade area. I consider those pullbacks ' small' pullbacks. Look at
the ABCD correction that terminates where the arrow is pointing. I consider
that a ' not small' pullback. Let me put a 2 1 -period simple moving average
on the chart, and we' ll look at the pullbacks again . See figure 5 .3 1 .
Figu re 5.31
::':. FLEX 1 5-1 !lEI EJ

1 4 . 800
1 4 . 600
/ 1 4 . 400
1 4 . 200
1 4 . 000
1 3 . 800
1 3 . 600
1 3 . 400
1 3 . 200
3w � SF SepSm
The 2 1 -period average, which is about the shortest period average I ever use
to 'ride out' ' small' pullbacks, clearly shows that the pullbacks in the middle
of this trend are ' small', and that the ABCD correction isn't ' small' . And
how did I choose a 2 1 -period moving average this time, instead of 25-
period, or even up to 34-period, as I sometimes do?
I don't want the reader to get the idea that I look over a potential example
chart, and choose the average that best makes my point. That is far from
what I do. I feel a little more explanation of the process is in order right now.
What I notice with most issues is that, at a given point in time, they trend
well on certain timeframes, and poorly, or not at all, on other timeframes.
1 17
My objective, as a trader, is to find trends that I like the looks of. To do that,
I have to search not only for the right issue, but also for the right timeframe.
I ' m looking for a certain look, and, for the most part, I don't care what
timeframe that look appears on. I ' m looking for a smooth, well-behaved
trend. That's the best way I can phrase it. Then I look at what moving
average, for example, seems to represent that trend the best.
In the example here in FLEX, the potential trade area was noticeable to me
on the 60-minute timeframe. I looked over that timeframe, and found that
the moves that were happening, moves where I would not want to sit
through any pullbacks or significant heat, were well-represented by the 5
period moving average. I looked at a 6-period, too, and found that it also did
a good j ob.
My idea here is to catch a thrust move on the 60-minute chart, and after it
got going a bit, to take the trade off once the move turned back even a smal l
amount. This could be done with the 5-period moving average cross exit
trigger on the 60-minute timeframe, or by using a longer period moving
average on the lower timeframe, or by using a regression channel technique.
So here's the context. The daily, my context timeframe, is telling me FLEX

is in a strong uptrend, although the trend had been going for awhile, and may
be due for a larger scale correction soon. The traded timeframe is the 60-
minute. I can see a clear potential trade area setting up in this timeframe. I
drop down to the I 5-minute timeframe for an entry trigger. I choose to
manage the trade on this lower timeframe, too.
Now, back to the moving average. With this trend getting fairly extended, I
decide that I want to be a little bit more sensitive, and jump out on the
'quick' side of things, since I know I ' m trying to catch what likely is the last
thrust before a larger scale correction. I choose to use the 5-period average
for my calculations. Since the I 5-minute chart has four times the data that
the 60-minute chart has, I multiply the 5-period moving average by four and
get 20-period. Since I like to use Fibonacci numbers when they are close by,
I chose a 2 I -period moving average.
If this trend wasn't so 'old', I very likely would have went with a 25-period
average, to give a l ittle more breathing room to the trade. Before I move
ahead with the chart, let me add on a trendline. There is only one way that I
1 18
can see to draw a trendline in here, and you ' l l soon see just how bad of a j ob
that line is going to do at representing the price action. See figure 5 .32.
Figure 5.32
?. flEX 1 5·1 !lEI £I

1 4 , 800
1 4 , 600
/ 1 4 , 400
1 4 , 200
1 4 , 000
1 3 , 800
1 3 , 600
1 3 . 400
1 3 , 200
3w Sf SepSm
Here you see the trendline skewed by that 'test' of the potential trade area,
forcing the line to go barely above parallel to the ground. That trendline wil l
b e useless for trailing stop purposes.
1 19
I ' ll add in a regression channel, using only the data starting from the
potential trade area up to the data on the far right side of the last chart. See
figure 5 .3 3 .
Figure 5.33
1 4 . 600
1 4 . 400
1 4 . 200
1 4 . 000
1 3 . 800
1 3 . 600
1 3 . 400
1 3 . 200
3w SF SepSm
The channel seems to represent the price action quite well. The channel
slope is in line with the slope of the moving average, albeit a little bit above
the average. 1 ' 11 zoom in on the chart, since we no longer need the additional
context. This will help clarify the trendline versus the regression channel
potential for this case. See figure 5 .34.
120
Figu re 5.34
_ c x
1 5 . 000
1 4 . 900
1 4 . 800
1 4 . 700
1 4 . 600
1 4 . 500
1 4 . 400
1 4 . 300
1 4 . 200
1 4 . 1 00
Sf SepSm
It is clear to see that the regression channel is doing a very good job
representing the price action for a stock as choppy as FLEX. It is j ust as
plain to see that the trendline will be of no practical use as a trailing stop.
12 1
But, what about updating the trendline? How about a trendline drawn to that
first pullback in the middle of the trend channel? Let's add that on, and see if
it looks l ike it could be of any use to us. See figure 5 . 3 5 .
Figure 5.35
1 4 . 900
1 4 . 800
1 4 . 700
1 4 . 600
1 4 . 500
1 4 . 400
1 4 . 300
1 4 .200
1 4 . 1 00
1 4 . 000
1 3 . 900
SF SepSm
No, that's less than completely useless to me. It' s already been violated, and
I ' m sure I don't want to be out of the trade at this point. I ' l l delete that line
off, and try another line. This time I ' l l go to the next pullback up in the
trend. See figure 5 .36.
1 22
Figure 5.36
1 5 .000
1 4 . 900
1 4 . 800
1 4 . 700
1 4 . 600
1 4 . 500
1 4 . 400
1 4 . 300
1 4 . 200
1 4 . 100
1 4 . 000
1 3 . 900
Sf SepSm
Now, that trendline looks pretty good. But it' s steeper than the regression
channel ' s bottom l ine, and the moving average. Is that steepness justified, or
is it just because the bottoms of the bars fel l where they did? I can't say.
What I can tel l you is, I prefer the channel or the moving average at this
point. The steeper trendline may kick me out earlier, and, depending on how
the trade plays out, that may or may not be the best thing. That's not my
concern, though.
My concern is in making the best j udgment call I can at this point, and the
almost seeming randomness to the slope of trendlines applied l ike this steers
me away from their use. I have to point out what I think is a paradox here,
though. What, in my opinion, is the biggest advantage to trendlines?
Everyone is watching them. And the biggest disadvantage to trendlines?
Everyone is watching them.
I believe that for every liquid issue that trades, there never has been, and
never will be, one single possible trendline that could be drawn, that some
trader somewhere doesn't have on his or her chart. Trendlines help you see
what 'the masses' are looking at. It helps me to see where things might get a
1 23
little 'goofy' . But since so many fol low them, I don't like to make trades
based on just a trendline violation.
I expect a sharp increase in noise when each and every trendl ine that can
conceivably be drawn on a chart is approached. Hence, I use the type of
trendlines that we have been adding to watch the behavior of the issue as
these lines are approached, but I prefer to use the other techniques, which
signal me in slightly different areas. All in all, though, there are so many
traders out there now, watching so many things, that just about every area on
the chart is some kind of commonly watched signal area. I feel that's a big
part of why the market is so ' choppy ' .
At this point I want t o go back to something from a previous chapter. I

pointed out how I watch the area between the 1 .272 and 1 .6 1 8 external
retracement (of the larger scope pullback) as an area where the trend may
start to correct again. I use this area as a guidel ine for me when I consider
where to scale out of some of my position. Let me add that to the chart, and
we' ll weigh it into the mix as we assess the trailing stops that we are looking
at. See figure 5 .3 7 .
Fig u re 5.37
::''1. FLEX 1 5·1 . !IS £J

--------,,£-- 15.03 1 R"t 1 .6 13
1 5 . 000
1 4 . 900
-----+---f7"--t+-'� 14.823 Ret 1.272
1 4 . 800
14 . 700
14 . 600
1 4 . 500
1 4 . 400
1 4 . 300
1 4 . 200
1 4 . 100
1 4 . 000
1 3 . 900
Sf SepSm
Chart created by Dynamic Trader (c) 1 996·2001
124
It is clear to see that FLEX is in the area where I suspect the move may end.
We saw from the LEN example earlier that sometimes the trend pays
absolutely no mind to this area, but most of the time, I find that this is the
area where the move ends. At the very least I want to consider exiting some
of my position in this area. I will examine this concept of scaling out in more
detail in the last chapter on scaled exits, but for now, let's be aware that I
would be watching this area long before FLEX ever got to it.
Let me add in one more price bar, and we'll assess what is happening. See
figure 5 .3 8 .
Figu re 5.38
_ C x
-------,L--;- 15.03 1 Ret 1 . 6 13
1 5 . 000
1 4 .900
--------.L--�I_t_'_'-,f- 14.823 Ret 1.272
1 4 . 800
1 4 . 700
1 4 . 600
1 4 . 500
1 4 . 400
1 4 . 300
1 4 . 200
1 4 . 1 00
1 4 . 000
1 3 . 900
SF SepSm 9
FLEX has triggered an exit using either the regression channel or the
moving average technique. With the strong gap down and further price
deterioration, this one would have been a candidate for an exit before the bar
actually closed. The area between the two external retracements seems to
have been the area of the end of the trend move. I am particularly alert to
this area when I don't expect a big move.
125
This was an old trend, as far as the distance from the last larger correction,
and my play was just to catch a thrust move into this area. I would have
scaled out more heavily than usual on this trade, and left less to a trailing
stop than I would have if I were trading the trend that led up to this move. I
look over the overall context, and I decide on what I think is the most likely
scenario. I use that judgment to decide on when, and how much, to scale out.
Let's look at how FLEX played out after thi s exit trigger. See figure 5 .39.
Figure 5.39
_ C x
--------/--+---r'- 15.03 1 Ret U.18

1 5 . 000
1 4 . 900
--------t'---T'-ff!-7lf- 14.1323 Ret 1.272
14.800
1 4 . 700
1 4 . 600
1 4 . 500
1 4 . 400
1 4 . 300
1 4 . 200
1 4 . 1 00
14 .000
1 3 .900
1 3 . 800
1 3 . 700
sf SepSm 9t 10
The call was good, as far as expecting one more thrust up to the retracement
area, and then expecting a larger scale correction to begin. Was this a good
trade? It played out very close to what I expected. From a reward/risk
standpoint, it meets my criteria. Some trades really take off, but many are
' singles' and ' doubles', and that is what I target.
I try to trail a stop to catch some part of the home runs, but I never target
home runs with a full position. I might go so far as to say that the last
example is a fairly typical trade, on average. I f it went further, the trail
126
would have kept the trader in. But I see no sense in holding a trade that went
down this far, thinking a larger move up might happen. At least, not in the
context of the timeframes and game plan that I use to get me into a trade like
this. The point is that it' s trades that work out on a level j ust like this that I
feel make up the bulk of the trades of the successful trader.
I want to conclude this chapter with an example showing how I most often
use the regression channels and trendlines, in what I call a 'hybrid'
technique. I presented a similar 'hybrid' in Kane Trading on: Entry
Techniques. For me, it uses the best aspects of the regression concept and
the trendline concept. With a l ittle subjectivity thrown in, it gives me one of
my favorite techniques for trailing a stop.
I prefer this 'hybrid' technique variation the most when I am attempting to

trade an issue that has oscillating swings, especially if they overlap a bit.
This type of price action can be difficult to trade; at least it is for me. I f I
find myself i n a situation where I feel that the issue will eventually gain
some trend speed based on my larger context evaluation (but first it is j ust
slowly oscillating and grinding i n my direction), I lean towards this
technique to keep me in the trade. A shorter period moving average, in a
situation l ike I ' m describing, will tear a trader to whipsaw pieces.
It' s important to understand, though, that I ' m not saying this variation is a
panacea, in fact, the actual difference between this variation and the standard
regression channel will be very l ittle. It might even be argued that it isn't as
good as the regression channel, or, if it is better, the extra time needed to set
it up doesn't j ustify its use. That i s the beauty of trading. No two people will
ever evaluate all the possibilities in the same way, at the same time. That, as
they say, is 'why we have a market' .
I point this out before presenting the technique because I want to make clear,
as I always do, that thi s i s what I l ike to use in my trading. Maybe you won't
find this variation better for your trading. I encourage the reader to
experiment with all of the techniques and variations that I am showing, plus
as many variations as can be thought up, as time permits. I feel that one key
to success is finding what works best/or you.
127
Let's look at a daily chart for C. The idea is that I was looking at a potential
trade area around the end of June, and I 'm now long. My desire is to
maximize the run, ride out the ' small ' pullbacks, and get taken out when the
pullbacks exceed ' small' . See figure 5 .40.
Figu re 5.40
4 , 000
3 , 000
2 , 000
1 . 000
0 , 000
9 , 000
8 , 000
7 , 000
6 , 000
5 , 000
4 , 000
3 , 000
2& Jun 9 1& 23 30 Jul 14 21 213
Notice how the last pullback has traded into the range of the previous
pullback. Generally I like to avoid trends with overlapping swings, but you
can't tell in advance how they will play out. I f I find myself in such a trend, I
just do the best that I can to maximize the trade. Sometimes trends with
overlapping swings tum out to be tremendous trades.
128
I'm also wondering if that last pullback is really too large to be considered
' small ' . I 'm going to add a 25-period simple moving average to the chart to
help me assess the scale of that last pullback. See figure 5 .4 1 .
)lhHltttl
Fig u re 5.41
4 . 000
3 . 000
jt1 jJ) t)
2 . 000
�
1 . 000
0.000
9 . 000
8 . 000
7 . 000
6 . 000
5 . 000
4 . 000
3 . 000
2& Jun 9 1& 23 30 Jul 14 21 28
Once the moving average is on the chart it becomes quite clear that the last
pullback i s well within the range of what I would call ' smal l ' , and at this
point I ' m ready to choose my trailing stop method.
129
I will add on a regression channel using j ust the data on the chart up to this
point. I will start the channel at the beginning of the uptrend, and use all the
data from there all the way to the right side of the chart. See figure 5 .42.
Fig u re 5.42
_ c x
4 . 000
3 . 000
2 . 000
1 . 000
0 . 000
9 . 000
8 . 000
7 . 000
6 . 000
4 . 000
3 . 000
2& lun 1& 23 30 lui 14 21 28
The first thing that I notice in this chart is how far the channel is above the
moving average. I also notice how the channel is sloping up at a higher angle
than the average. I want to wait and see, as the trend progresses, what
happens with this, but it does make me think that the channel might be too
narrow to represent the price action i f it swings around very much. Yes, if
the price action swings a lot I could j ust extend the channel to include the
new data, but as I mentioned, I ' d prefer not to do that if possible.
130
Let's move ahead, and see how the channel is doing with the price action.
See figure 5.43 .
Fig u re 5.43
5 . 000
4 . 000
3 . 000
2 . 000
1 . 000
0 . 000
9 . 000
8 . 000
7 . 000
6 . 000
5 . 000
Jun 1& 23 30 Jul 14 21 28 Aug

The channel has been doing a fairly good j ob representing the price up until
the very last area on the upper right hand part of the chart. The last thrust up
fell quite a bit short of the channel top, and now we have a close below the
lower channel line. This would be an exit trigger if one were using the
regression channel as the trailing stop. Again, notice how the last pullback
has traded into the area of the pullback that came right before it. This is yet
another set of overlapping swings.
I didn't change the channel at all, using the new data. If I did, perhaps the
exit wouldn't have been triggered. The ' new' channel may have widened,
and enclosed the last price bar's close. The problem with regression
channels is that they are mathematically designed to encompass 95% of the
data points (when set to the ' normal ' default of 2.0 standard deviations), so
unless the move is fairly big, the channel will adjust to keep it inside.
13 1
I don't think a regression channel is as effective i f it i s constantly adjusted
for the newest data. I prefer to let the trend go for awhile, and when I feel it
has went far enough for me to see some consistency in the price action, I ' set
the channel ' . I have had better results i n my trading doing it that way, as
opposed to when I constantly try to adjust the channel as the trend unfolds. I
still suggest the reader experiment with this, and see what works best for
him or her.
So, what is my interpretation of the exit signal that the regression channel
has given here, then? Given where the moving average is with respect to the
lower channel l ine, I can say that I wouldn't want to be out of this trade right
now. Maybe I would want to be out soon after this, if it continues to drop,
but judging by the look of the price action, this looks l ike j ust about the
exact point I would expect the next thrust up.
I ' ll add on about another months worth of data, without changing the
regression channel, and we' ll see how the channel has been doing at
representing the price action. See figure 5 .44.
Figure 5.44
• •
8 . 000
6 . 000
4 . 000
2 . 000
0. 000
8 . 000
6 . 000
Jun ':t 16 23 30 Jul 14 21 28 Aug 11 18 25 5

132
This is interesting. The moving average is quite a bit below the price action,
and the regression channel. There have been many price probes below the
bottom channel line, and very little action near the top channel line. All in
all, the price action isn't 'working the channel' , going from bottom to top,
back and forth. It' s been more of a grind up. Until the last bar shown on the
chart, there hasn't been a close below the bottom channel l ine since that
initial exit trigger.
At this point, the channel is triggering another exit. When you see how much
further the price has risen since that first exit signal, it is plain to see that the
channel would not have done a very good j ob as a trailing stop in this case.
Let me add in one more price bar, and we'll assess what is happening. See
figure 5 .45 .
Figu re 5.45
_ c x
8 , 000
6 , 000
4 , 000
2 , 000
26 Jun '3 16 23 30 Jul 14 21 28 Aug 11 18 25 Sep

C has gapped down and plunged through the moving average. Regardless of
the trailing stop technique that I may have chosen, I would be long gone in
here. In fact, this example would have been much a much better example if
C didn't plunge so aggressively on this last bar. I would prefer it if I could
133
present my variation, and then have C give a nice exit trigger. As it is, any
trailing stop technique that I would choose for this trade is going to trigger
on that last plunge bar, and certainly before the bar closes.
I mention this here for two reasons. One reason is that I wonder if a few
readers are saying ' If you stayed with the channel, you would have got an
exit right there on the close of the third last bar on the chart, before you had
to take the heat from that plunge. ' Not true, though. I f you stayed with the
channel, you' d have been out over four dollars earlier with that close below
the lower channel line. You can't just ignore signals and then look ahead and
pretend you' d still be in. That signal three bars back doesn't exist. When the
earlier exit was triggered, the trade was over, the channel was erased, and we
moved on.
Secondly, I chose this example because this is real world stuff. Sometimes
you work extra hard on constructing the best trai ling stop plan that you can
come up with, and then you get a gap and plunge, or gap and thrust. You bail
out, regardless of which trailing stop method you chose. No time to wait and
see; it's dropping like a rock or launching l ike a rocket, and it's time to react.
I like to include some examples in my works that represent things that
traders actually have to deal with, even if it doesn't demonstrate the
technique at hand quite as well .
134
Let's look now at what I do in a case l ike this. I ' l l go back to the original
channel, right after we created it. Instead of telling you what I am going to
add to the chart, I ' l l first show you the chart, with an addition. Then I ' ll
explain what I have done. See figure 5 .46.
Figure 5.46
2& Jun 1& 23 30 Jul 14 21 28

You can see an additional line below the channel. You can also see that the
line is parallel to the channel lines. I ' ve used the 'clone l ine' feature on the
software, and cloned the centerline. It doesn't really matter which line you
clone, since they are all parallel to start with anyways. I use the centerline
because sometimes I delete off the channel lines, or simply just put the
regression l ine on without the channel lines.
I've moved the new, cloned line up until it touched the farthest price point
outside of the channel . In other words, I moved the l ine up until it touched
the first price data that it could touch, using all the price data since the
channel started, and then I dropped the l ine at that point.
135
I ' m going to make another addition, and, again, I ' ll show the addition first,
and then explain. See figure 5 .47.
Figure 5.47
t
26 Jun 16 23 30 Jul 14 21 28
What we have here is another paral lel line, this one below the last one. I call
this my 'cushion' l ine. I know I want to give this one some breathing room. I
feel this way because of the overlapping swings and the fairly large distance
to the moving average. The moving average is a favorite of mine, but if I ' m
i n a trade, and the swings start to overlap l ike we see here, I lean heavily
towards the regression channel hybrid that we are constructing right now.
So how much cushion do I add? I have no set rules, I just add in a little bit. I f
the first line drops out pretty far, I may leave i t at that. In this case, the first
line, the 'touch the outside price data' l ine, wasn't very far from the channel,
so I opted to go out a l ittle bit more with a second l ine. I 've learned by
experimentation, and from experience, the approximate amount that I want
to go. I don't feel that this is an exact science. An approximate amount is
fine for my trading.
136
The lines shown on the last chart are very roughly 1 50/0 of the size of the
channel . I only measured this so I can point it out here. I don't do any
measurements l ike thi s in my own trading; I simply look at the chart and see
that I want to add some extra cushion so that I don't get popped out early.
I 'm willing to 'give back' a l ittle in exchange for the greater likel ihood, in
my opinion, of staying with the move. That is why I said 'with a little bit of
subj ectivity thrown in' . I suggest that you experiment with this and find out
what works for you, starting with what you see here.
Let's move ahead now, to right before the plunge, and see what the price
data is doing, with respect to the new l ines. See figure 5 .48.
Fig u re 5.48
t
26 Jun 9 16 23 30 Jul 14 21 28 Aug 11 18 25 Se�
That looks like a lot of l ines, and it is somewhat confusing, at least for an
example. L et me delete off the top two l ines, since we are not going to use
them to analyze the exit action at thi s point. See figure 5 .49.
1 37
Figure 5.49
?: C 0-0 ' !IS £'J
26 Jun 9 16 23 30 Jul 14 21 23 Aug 11 is 25 Sel

That' s a lot better. We now have the old regression channel bottom line, and
the two new lines that I have added. Look at the price action with respect to
the two new lines.
Those familiar with my book Kane Trading on: Advanced Fibonacci

Trading Concepts understand that I never think of specific points, I think of
areas. I came up with the term 'Potential Trade Area' to describe an area
where I may want to get involved with a trade. I think in terms of areas,
since I feel that it is impossible to determine exact points in trading. Trading
is about probabi lity.
Let me bore the reader with an analogy. When I was taking chemistry in
high school, we learned about electrons being here or there, at some point in
space. When I got to upper level chemistry in college, the professors freaked
out al l the students by talking about electron probability densities. These
were areas (spaces, actually) where there were certain probabilities of the
electrons being there. I try to apply this concept to my trading.
138
My point here is that the space between the two lines that I added to the
chart is my ' area' . I watch the price action in the space between the lines. It
should rebound from there. If it closes below the first line, I ' m ready to get
out. Any rapid move below the next line, and that's it. Any close below the
lower line, and that' s it. The area between the lines should bounce the price.
If it doesn't, I ' m ready to go.
Now go back to the chart, and look at it that way. The area was clear of price
action most of the way up the chart. Then a sharp move down into the area
on August 23, and a very quick bounce. Then notice what happened. There
were four bars in a row, al l of them clustering in the area, and two of the
bars closing in there. And the last bar, it closed right on the line.
If I j ust chose to drop the l ine a fraction higher, this trade would be over.
Even though I would wait to see what happened from here, I was fully
expecting this trade was going to be over on the next bar (boy, was I ever
right ! ). Let me add that plunge bar back onto the chart. See figure 5 . 50.
Figu re 5.50
2� Jun 9 16 23 30 Jul 14 21 23 Aug 11 13 25 Sep

139
I would have closed thi s trade on the gap opening. As I mentioned, th is is
how it sometimes goes. The point is, when you look at the price action as we
did here, with the two l ines and the concept of the area between them, there
were warning signs. These warning signs aren't always correct. Sometimes a
large fund decides that day that they have to have a raft of the stock, and off
it goes. But I have found, more often than not, the warning signs are
important to heed.
How might I have used this information? The run in C was pretty good up to
this point. When the action started to c luster in the area between the lines, I
would have lightened up. I would still have keep some on with a remaining
trail, but this kind of price action, this late in the trend, would have had me
scaling out of more of the trade than I would have if the action had bounced
off of the area.
1 40
Let me make one last point in this example. I ' m going to add an arrow to the
chart. Try to guess the significance of the area that the arrow points to. Then
1 ' 1 1 reveal what it is. I ' m also going to delete off the lower channel line, and
leave only the two l ines that we worked with as we finished up this example,
for clarity. See figure 5 .5 1 .
Fig u re 5.51
8 . 000
6 . 000
4 . 000
2.000
0.000
8 . 000
6 . 000
t
4 . 000
26 Jun 9 16 23 30 Jul 14 21 28 Aug 11 18 25 Sel

I would be surprised if anyone got this one. Don't feel bad if you didn't get
it, it' s not exactly the type of thing that would come to your mind. The arrow
points to the time when the two line were constructed. Those l ines were on
the chart, waiting to signal the trader out, that far back. The price j ust
followed them up, got crowded in the area between them, and then broke
through and triggered the exit. It sure doesn't look random to me, viewed in
that l ight.
141
The last thing that I want to do is show what happened to C after that plunge
bar. Did the trail ing stop point to the correct area for the end of the trend,
even if the last part of the trade had some giveback? See figure 5 .52.
Figure 5.52
i
_ 1:1 x
�)
8 . 000
6 . 000
4 . 000
2 . 000
�t � 0.000
8 . 000
r. w
6 . 000
t
.
4 . 000
26 JUri 9 16 23 30 Jui 14 21 23 Aug 11 13 25 Sep 8 15 22 29 Oct

I would say that the trend was, indeed, over at the point that the trailing stop
triggered the exit. Looking at the two lines here (now shown with the lower
channel l ine), I would say that they did a pretty good job guiding the trader.
They were a much better choice than the moving average in this case, and
better than the regression channel alone.
I find the use of two parallel drop l ines one of my best techniques. It gives
me an area to work with, and I can adj ust that area a l ittle bit, based on how I
see the issue behaving. This is much less rigid than either the regression
channel or the regular trendl ine, or even the moving average techniques. I
l ike to use this variation best when the issue starts to have overlapping
swings, is getting choppy, or is doing a grinding move.
1 42
Usually, I also have my best choice moving average on the chart at the same
time, and I like to see what they are saying with respect to each other. If one
starts to look like a better choice than the other, I ' m not opposed to changing
on the fly. And as we' l l see when we get to the last chapter on scaled exits, I
actually use more than one technique at a time, scaling out of some of my
position when one technique triggers, and scaling out some more when the
next one triggers.
The next four chapters will be somewhat shorter chapters. There are four
very important concepts that I want to present, but they will not require as
much detail, or quite so extensive a series of examples, as the material
presented so far. Nonetheless, I feel that they are great concepts, and I want
the reader to have these for his or her trading arsenal.
143
Chapter 6
x-Bar Stops
The concept of an x-bar stop is quite common in the trading literature. You
can find a lot of discussion on a 2-bar stop, or a 3-bar stop, and so on. Each
writer has his or her own variations on the use of this technique. For me, I
use it very sparingly, utilizing only a small subset of variations, but I feel it
has its place in my plan. I will present the ways in which I use this
technique, with my thoughts on the 'where and why' of how I apply it like I
do.
First, let me explain what an x-bar stop is. The basic concept is to trail a
stop, using the low (for long trades) or high (for short trades) of a previous
price bar as the trigger point. If any trade exceeds that price bar low or high,
an exit is signaled. One can choose how many price bars back you go to find
the signal bar. The most common use, in my experience is two or three bars
back.
The next issue to come up when attempting to uti lize this technique is how
to actually count the bars. How do you count an inside bar? Some count the
bar, and some don't count it. How about outside bars? Do you still apply the
technique with a large expansion bar, even if that puts the stop excessively
far away from the current price action? L ike with many other techniques, the
value of this particular technique may rest not with the inherent value of the
technique itself, but in how well you choose your parameters for its use.
I have spent a lot of time looking at x-bar techniques, and I have found, Jor
my trading, a few variations that I like to use on occasion. I am going to
present these techniques here, with the usual caveat that goes with all of my
presentations. What I will offer up is what I have found works for me and my
trading. You should experiment with what I present, and find out if it is of
benefit to you and your trading.
I have no idea what your particular trading plan is, or what it calls for. For
that reason, I can't say whether the ideas that work for me will work for
anyone else. But the ideas that I present should, at least, create a good
starting place from which to find what variation(s) may work for you. I keep
repeating this same concept, perhaps too many times, to convey the very
145
important idea that what I try to do is to have the reader ' look over my
shoulder' , to see my thought processes with regard to trading. Then, once the
thinking process is understood, the trader can then do as I have done,
experiment and explore to find what will work best for him or her.
It' s a very personal process, and hence I never, ever present anything with
the idea that it is to simply be used exactly as I present it. Unless it was a
pure, ' lucky' coincidence, nothing I present, with the exact parameters that I
show, should fit into anyone else ' s game plan as is. I have 'tinkered' with all
the variables for endless hours to exactly suit them to fit into my unique
'Trading Plan ' .
Understand that if I didn't think this was such an important concept for the
reader to grasp, I wouldn't harp on it so endlessly. It i s my personal belief
that there is no single indicator, or technique, that can be taught to anyone
who simply wants to learn it, which can produce fabulous trading profits. I f
there were, all these small hedge funds would know it, use it, and the 'edge'
would rapidly disappear.
In my opinion, all that works over time, that ' stands the test of time' , is the
development of a feasible, comprehensive, unique, adaptable, skill-based
'Trading Plan'. My goal is to help my readers achieve the development of
this plan, and in order for me to do so I must go on these long tirades from
time to time. I need to make sure the context of what I present is always
clear, as well as the necessity for hard work and the avoidance of seeking the
'ultimate technique' to ' make you a winner' .
Let's get back to the task at hand. There are two basic situations where I
look to use an x-bar trailing stop. The first situation is at a time when the
setup is very similar to when I would use a very short period simple moving
average trailing stop, such as a 5-period. My intention is to catch a
momentum thrust and sit through very little 'heat' . I sometimes combine
both the short period average and the x-bar trailing stop, to see how they
support each other.
The next application I have for the x-bar trailing stop is when I go down to a
lower timeframe, where there are small pullbacks that I plan to ride out (or
when there are small pullbacks that I intend to ride out on my traded
timeframe), and I then use the technique to determine scale out points. What
I am doing in this case is trailing multiple stops on each smaller thrust within
146
the trend that I am following, to scale out in multiple pieces. I will explore
this more in the last chapter on scaled exits.
Let's start with an example in YHOO. I ' l l begin with a daily chart, and put
an arrow on the chart pointing to a potential trade area where I may have
gotten short. I ' d now be in the trade, looking to stay with this thrust down
until I get a 5-period trailing stop exit signal, or I get a signal from an x-bar
trailing stop. See figure 6. 1 .
Fig u re 6. 1
?: YHOO D -D !lEI £!
35 , 000
34 , 000
33,000
1\
32,000
h
3 1 . 000
30 ,000
29 ,000
28 , 000
27 , 000
26 ,000
23 30 Jun 13 20 27 Jul 11 18 25 Aug
The trade is moving down very well, and I ' m thinking about how I want to
trai l my exit stop. The play is for the thrust downward, without riding out
pretty much any 'heat' on this timeframe.
147
Let me add in a 5-period simple moving average trailing stop, to get an idea
what I would be looking at with that technique. See figure 6.2.
Figu re 6.2
?1. YHOO D·D !IS £!
35 ,000
34 ,000
33, 000
32 , 000
It
3 1 ,000
30 , 000
29 , 000
28 ,000
27 , 000
26 , 000
23 30 Jun 13 20 27 Jui 11 18 25 Aug
Chart created by Dynamic 1r ader (c) 1996·2001
One possibility that I could use here is a very 'tight' stop, a I -bar trailing
stop. In this case, I would be triggered to exit as soon as any price trades
above the previous bar' s high. This i s an extremely sensitive trigger, and can
lead to some false stop outs.
On the other hand, it can also stop out a trade without very much give back,
and can frequently trigger the trader out of the trade on the bar right after the
low bar (or high bar in the case of a long trade) of the move. It' s a trade off
whether to use such a tight stop. In most cases where I would consider a
very short period moving average cross exit trigger, 1 ' d almost always
consider a I -bar stop exit trigger, too.
148
I ' ll add two more price bars onto the chart, and we' l l see how the trade is
progressing. See figure 6.3 .
Figu re 6.3
1
?: YHOO 0-0 I!!IEU!I
35 .000
�
34.000
33. 000
32. 000
3 1 . 000
30 .000
29 .000
28.000
27.000
26.000
23 30 lun 13 20 27 lui 11 18 25 Aug S
The last bar is a doji bar with a somewhat long downside tail. This may be
an early indication that this move is going to pullback, or reverse, very soon.
I ' m going to try a I -bar trailing stop here for half of my position, and use the
5-period moving average cross exit trigger for the other half, for the sake of
this example.
I need to lay out some parameters for the I -bar trailing stop, as I use it,
before we can proceed. I determine the bar that I use for the trailing stop by
first watching to see if the bar sets a new low for the move (or high for a
long trade). If it does, this is the new bar, whose high is now the trigger
point. Any trade above that point, and the exit signal is given. But what if
the bar doesn't set a new low? What if it is an inside bar?
I don't count inside bars. I keep the stop right where it is. Every time a new
bar sets a new low for the move, the stop moves down to the high of that bar.
149
That covers most of what can happen, except an outside bar. If an outside
bar forms by first trading above the previous bar's high, the exit would be
triggered before the bar completes, and the point is moot because the exit
signal has already been given. If the bar sets a new low first, and then trades
above the previous bar's high, what then?
Well, I must first say that I don't encounter this very often. One of the
reasons, I think, is because a lot of moves have expansion bars at or near
their terminus, and then there usually is a bit of a pause after that. It's not
real common, in my experience, to thrust down and then reverse up above a
down expansion bar, all in one shot. But sometimes, j ust by the coincidence
of where the time of the bar ends, you can sometimes get a small bar that
goes down and sets a nominal new low for the move and then j ust trades
sideways.
This gives you a small but lower bar, and one that you would have to use as
the new bar for the trail ing stop. The next bar starts and sets another nominal
new low, and then they come for it, and it thrusts up and you have an outside
bar that first sets a new low for the move, and then takes out the trigger high.
But yet this move hasn't even come close to the previous trigger high from
two bars back. And maybe the nominal new low that was set, was set by one
cent on each of those two bars. This doesn't sound to me like a very
technical stop out point, then, moving the stop to that small, new bar.
When this happens, I make a j udgment call based on how the situation lays
out. Sometimes I lean towards the moving average trigger instead.
Sometimes, if the previous longer bar wasn't a big expansion bar, I ' l l stick
with that previous trigger. And sometimes I ' l l move the stop to a point j ust
above the halfway point on that bar that I was using for the stop. I
commonly set the new stop trigger at 3 8.2% from the top of the bar, since
that's j ust above the halfway point, and I like to use F ibonacci numbers if I
can. All of this may sound extremely subj ective, but in practice, it doesn't
seem to be subj ective to me.
I follow the ' rules' , and one of the 'rules' is that if I get a small bar that sets
a new low and forces me to move the stop to a technically unrealistic place, I
look at the chart and decide if I should j ust stick with the old stop, or move it
to the point j ust past the halfway point on the old bar. That's it. Regardless
of which of these ways I go, it' s all going to be a very small difference, and I
150
don't worry about it. Keep in mind that I have described these scenarios for
an example short trade. For long trades, the process is j ust done i n reverse.
Let's add on another price bar, and see what has happened in our YHOO
example. See figure 6A.
Figure 6.4
::':. YHOO 0-0 '

I!!Gl E3
35 . 000
�
34 .000
33 .000
32. 000
3 1 . 000
30. 000
29.000
28 .000
27. 000
26 .000
23 30 Jun 13 20 27 Jul 11 18 25 Aug 8
YHOO has now triggered an exit, whether you were using the 5-period
moving average cross or the bar high violation technique. The better price
would, theoretically, have been obtained with the bar high violation, since
the trader wouldn't have had to wait for the close of the price bar to exit. Of
course, if the trader has chosen to use the moving average cross technique
with j ust a price cross and not a price close, the exits would have been nearly
identical.
I ' m going to show a 60-minute chart of this trend move, for the educational
value it presents here, even though it does not directly pertain to the bar stop
technique. I ' m going to add to the chart a 34-period simple moving average
151
and a regression channel. This will show what a trader, opting to manage the
exit on the 60-minute timeframe, could have been looking at.
I decided on the 34-period moving average by using the calculations that I

have mentioned before. The 60-minute time frame has 6.5 times the data that
the dai ly timeframe has, and we are working with a 5-period average on the
daily, so a 32.5 period average is a good starting point. I simply chose my
preferred 34-period Fibonacci average. I will also draw in a horizontal
trigger line, showing our I -bar stop from the daily chart. Be prepared to be a
little bit surprised. See figure 6.5.
Figure 6.5
_ OJ X
33. 000
32 . 000
31 . 000
30 . 000
r--'N� H 29 .200 l lAg9 :30

29 . 000
23w 2<k 25f lui 29t 30w 3 it if Aug 5t f.w 7t Sf Aug i2t
What you are seeing is something that I have found in example after
example in Kane Trading on : Entry Techniques. The techniques here, too,
frequently point to almost the exact same area. I find this endlessly amazing
to me. It doesn't matter how many times I see things like this. I continue to
be amazed. Three supposedly disparate techniques, and they all point to
essential ly the exact same spot.
152
Let's go back to the daily chart, and see how this played out from here.
Regardless of whether YHOO rol led right back down or rocketed up, I won't
play ' after-poker' and say that I should have stayed in, or that I was glad I
got out. I have chosen three techniques here, and asked that they point me to
an area where my research has shown that the probability is that the trend
move I have identified is over.
The techniques all triggered. Unless I was to modify my trading plan, the
'right move' was executed, and that was to exit. Until such time as I modify
my game plan and it then says otherwise, what happened next is really
immaterial. I ' l l show how it played out anyways, though, for the sake of the
example. See figure 6.6.
Figure 6.6
?. YHOO 0-0 I!!il3 ti

38. 000
37 . 000
36.000
35.000
34 . 000
33 . 000
32 . 000
3 1 . 000
30 . 000
29 . 000
28 . 000
13 20 27 Jul 11 18 25 Aug S 15 22 29 Sep 12 19

In this case, the exit point came right after the bar that set the low for the
entire downtrend. This trade was very wel l maximized using any of the three
techniques. Now, wil l it always work out l ike this? Absolutely not.
Sometimes an issue will headfake the trader out of the trade, and the trend
will continue on for an excessively long move. That's trading. But I have
153
found, in many instances, this technique can be uncanny at picking the best
places to exit, if your goal is to optimize your trade in a trend move such as
this.
Let's look at one more, brief example of this 1 -bar trailing stop technique.
Then we' ll finish with the x-bar trail ing stops by applying them to scaling
out on a lower timeframe. I will choose this example such that the exit does
not come at a reversal point, but is merely the start of a pullback, albeit a
pullback that the trader doesn't want to ride out.
154
AMZN is in a strong uptrend on a I 5-minute chart, and has j ust gapped up
huge. The longer-term time frame implies that a solid uptrend is in place, and
it' s likely that a recent larger scale correction has j ust been completed. A
long entry is sought if AMZN continues to look strong after this gap up. A
potential trade area is spotted in the form of an alternate ABeD with a good
deal of Fibonacci support, forming a nice price grouping. The arrow on the
chart points to the potential trade area.
Let's assume a long entry was gained somewhere in this area, and we want
to stay with the trade until a 5-period simple moving average, or a I -bar
stop, triggers an exit. See figure 6.7.
Figure 6.7
?: AMZN 1 5-t !IS F3
lw a �
The trade is starting to play out nicely. At this point I want to be ready with
my trail ing stop technique.
155
I ' ll add the 5-period simple moving average to the chart. We' l l also start to
watch for any trades below the low of the previous bar. See figure 6 . 8 .
Figure 6.8
?: AtdZN 1 5-1 ' , 1!!8 £I
3 . 000
1 . 000
lw � �
The trade is progressing quite well, and the 5 -period moving average is
really representing the trade well. If you look at the price action before this
move, on the lower left hand part of the chart, you can see that the 5-period
average doesn't do that good of a job at representing the price action there.
One would need a more lenient average, or accept catching smal ler moves,
to trade that area in this manner.
The reason that I feel that the average might work in this case is because, in
my experience, many times the way the market is trading at this point in
time, a gap up that is not closed right off, but instead continues to rise,
frequently results in this slow, steady accumulation for most, if not all, of the
rest of the day. This character may change at any time as market conditions
change, but it happens enough that I feel a short period average or I -bar
trailing stop may catch a lot of the move.
156
Notice that the last bar on the chart in figure 6.8 i s a near doj i, with a fairly
long upper tail. This is not the first weak bar in the uptrend, but considering
the length of the move, I ' d be getting very alert in here. I ' l l add on two more
price bars, and we'll assess the situation. See figure 6.9.
Figure 6.9
?. AMZN 1 5-1 !IS £'J
1w � �
The exit has been triggered on that last price bar, by both the moving
average cross technique and the I -bar violation technique. I ' ll show a close
up of the chart so that this can be seen more clearly. See figure 6. 1 0.
157
Figure 6. 1 0
�
?: AlitZN 1 5-1 I!!EI £J
f l 52 .950 30<l.,15
Notice how the second l ast price bar was an inside bar, and was ignored for
use as a stop. The horizontal stop l ine stayed right were it was as the inside
bar completed.
The interesting thing here is how close the exits are to each other for these
two techniques. The I -bar stop would have an exit price of right under the
trigger line, so we' ll call that $52.94. The close of the price bar below the
average was $52 .97. The techniques triggered within three cents of each
other. Let me point out that these are theoretical prices that I ' m using, for
comparison purposes. I ' m not suggesting that anyone could, or did, get filled
at these exact prices, of course.
158
I'll add a lot more data onto the I S-minute chart, so you can see the
perspective of this trade, and what the move looked l ike. See figure 6. 1 1 .
Figu re 6. 1 1
?. AMZN 1 5-1 !IS £i
�"'*""ti'if"--- L 52.'350 30c 14:15
lw 2t 3f OctGm 7t
I 'd like to point out here how this technique targeted a thrust move, and
triggered an exit as soon as even a slight reversal started to unfold. The
technique caught exactly what I had chosen it to catch. The technique did a
great job at doing what it was designed to do. Although some of the moves
on the lower left hand part of the chart would have been a bit tricky using
this technique with the parameters that I have chosen, look at the upper right
hand part of the chart, in the area after the trade that we just analyzed.
I originally was going to show this latter trade, but felt that it was too ' well
chosen' . It' s a l ittle bit difficult with thi s zoomed out chart, but look at how
well the average, and the I -bar trailing stop technique, would have worked
for that move. L ike all trading, sometimes the trades work out well,
sometimes they don't work out at all, and sometimes, like on the upper right
hand part of this chart, they work out absolutely great.
1 59
I ' m going to show a weekly chart of AMZN, j ust to show the kind of
uptrend AMZN is in here, and why my bias would be towards hitting long
trade after long trade. I know it' s a big j ump from a I 5-minute chart to a
weekly chart, but I want to show this because I think it really points out how
a person who is doing very short term trades should still never lose the
context of what their trading issue is doing. See figure 6. 1 2.
Fig u re 6. 1 2
::.-:: AMZN Wow I!! S £I
5 , 000
0 , 000
5 , 000
0 , 000
35 , 000
30, 000
25 , 000
20, 000
1 5 , 000
1 0 , 000
Sep Oct Nov-Dec 02 Feb Mar Apr MayJun Jul Aug Sep Oct Nov-Dec 03 Feb Mar Apr lI'layJun Jul Aug Sep (
Now, that's a trend! The trade we looked at was in the second last bar from
the right.
I ' m going to move on to using the x-bar trai ling stop on a time frame where
' smal l ' pullbacks are going to be ridden out. This can be because the trader
has dropped down to a lower timeframe for management, or because the
trader's game plan has the ' smal l ' pullbacks being ridden out in the traded
timeframe. It doesn't really matter how one gets to that point. If there are
smaller pullbacks to ride out, I start to look at using the x-bar stop to do
some scaled exits.
160
Let's look at a previous example in the ES from Chapter 4, on the 3-minute
chart. 1 ' 1 1 show a chart of the trend as it played out, to refresh our memories.
See figure 6. 1 3 .
Figure 6. 1 3
?: ES03Z 3·1 !l9 D
1 025.00
1024 . 00
1023 . 00
1 022 . 00
1 021 . 00
1 020 . 00
1 0 1 9 . 00
1 0 1 8 . 00
1 0 1 7 . 00
1 0 1 6 . 00
23t
The chart shows the trend that we analyzed back in Chapter 4, using the
moving average crossover exit trigger. I also looked at the 2 1 -period simple
moving average cross exit trigger at the same time, which was my
preference between the two techniques. I have included the 2 I -period
average on the chart, to show when that average triggered an exit on the
overall position.
But I also talked a lot about scaling out. One method to determine a scale out
point i s to trail a stop on each smaller thrust move. In this case, I prefer the
I -bar stop technique to the moving average technique because it is generally
more responSIve.
16 1
Let me label the chart with the possible I -bar stop lines that I ' d likely use for
scale outs. See figure 6. 1 4.
Figu re 6. 1 4
< <
?: E S 032 3·1 !lEI E.I
1 025 , 00
L 1024.75 23Sp 10 :30
1 024 , 00
L 1023,75 23Sp9:54
t /
1 023 , 00
L 1022,00 23Sp9 :33 1 022 , 00
1 021 , 00
L 1020.50 22Sp15:54
1 020,00
1 0 1 9 , 00
1 0 1 8 , 00
1 0 1 7 , 00
1 0 1 6 , 00
23t
Chart created by Dynamic Trader (c) 1 996·2001
Every time the ES makes a new high thrusting move, I trail a I -bar stop, and
take some profits. Sometimes I use another technique other than a I -bar stop
for this scale out trigger, but I use this one quite a bit. I will get into this a bit
more in the last chapter, when I cover scaled exits in more detail. For now, it
should be clear what I am doing. I am letting the market tell me when to get
out, while trying to strike a balance between not giving up too much profit
and giving up enough so that I can attempt to maximize the run.
I'd also l ike to point out that I may not have used the first (lowest priced)
trail for a scale out. It would depend on where I originally got into the trade.
I'd also l ike to point out that there were two triggers at 1 023 .75, the original
trigger, and a second one at the same price, since a new high for the move
was set, and the low of that bar happened to fall at the same place.
162
I ' ll add a 5-period moving average onto the chart, for comparison purposes.
See figure 6. 1 5 .
Fig u re 6. 1 5
::::: ES03Z 3-1 !!lEI £I
1 025 , 00
L 1024.75 235p 10 :30
1 024 , 00
-'-I1'-t++.L.f-'r-fl---::>"'T- L 1023 ,75 235p9 :54
1 023 , 00
'-t--+++-�---- L 1022,00 235p9:33 1 022,00
1021 , 00
Y-Ift....L..L.--++,,,L--- L 1020,50 225p15:54
1 020 , 00
1 0 1 9 , 00
1 0 1 8 , 00
1 0 1 7 , 00
1 0 1 6 , 00
23t
Notice how, for the most part, the 5-period average lags the I -bar stop. Even
if the trigger used was a simple price cross without waiting for a price bar
close, the moving average would have the trader giving back more than the
I -bar trigger, on average. This is why I generally prefer the I -bar stop for
this type of management.
In closing this chapter, 1 ' d like to quickly discuss x-bar stops other than with
I -bar as the parameter. I find that there are sometimes occasions when I like
to use a 2-bar stop. I rarely, if ever, use 3 -bar or higher stops, although I
think they can be quite valid for some trader's plans. My use of 2-bar stops
is j ust l ike for I -bar stops, except the trail is always two bars back from the
new high or low (counting the new high or low bar as ' bar 1 ').
I count a new bar when it sets a new high or low, and I don't count inside
bars. I treat outside bars in a similar fashion as to how I treat them for a 1 -
163
bar trail . I usually use a 2-bar trail when I desire a wider stop, to let the issue
have a little bit more room. This usually comes at the beginning of a run,
where I want to sit through a bit more ' noise ' , to give things a chance to
develop.
As the trend continues more and more in my favor, and as it approaches the
average move for a trend in that timeframe, I want to 'tighten up' my stop.
At that point I ' ll frequently move to a I -bar stop. The important thing here is
not exactly when I might use a 2-bar versus a I -bar trail, the important thing
is that you understand the concept so that you can now experiment with it,
and find out if it has a place in your 'Trading Plan ' .
Before we move on, I ' d like to mention one thing that I haven't discussed
yet. What if an extreme, or even j ust a very large, expansion bar forms? That
would place the stop, even if it was a I -bar stop, very far away, and likely
not in a very good place technically. What do I do in a case like that? The
answer is: I generally abandon the bar stop method, or I use the ' 3 8 .2% of
the bar' variation. I wi ll address this concept in more detail in Chapter 9,
'Blow-Off Moves & Windfalls ' .
I n the next chapter we are going to ' fix' the amount of the trailing stop, so
that, instead of it being one or two bars behind us, it will be x dollars (or
points) behind us. That way, the trail is not susceptible to the vagaries of the
individual bar heights.
164
Chapter 7
Fixed Amounts
The use of a fixed amount for a trailing stop is another of my strongly

preferred techniques, given the right set of conditions. It may seem like I
have a lot of ' strongly preferred' techniques, but that's not quite so. For a
given situation, I usually have one or two techniques, or variations, that I
really like,jor that s ituation. I wish I could j ust lay out for you exactly what
I like, and where, but I can't. You must learn this, for yourself, from
expenence.
I like using the fixed amount trailing stop technique with issues that I am
particularly familiar with, if the issue trades very consistently. The idea is to
determine, from extensive experience with the price action of that particular
issue, what types of pullback moves the i ssue normally makes. Then I can
set my stop just outside of that amount. I want to point out, though, that I
almost never use this type of trailing stop (or most of the trailing stops
presented in this book) exclusively, I use it in combination with scaled exits,
where some of the exiting is done into strength (for longs, weakness for
shorts).
I want to make something clear here. I almost always talk about trailing
stops and scaled exits together. I would have liked to have had the last
chapter in this book, ' Scaled Exits' , be the first chapter, but I couldn't
because the readers don't know the techniques yet. This would have allowed
a better understanding of how they fit together, and why I mention it so
often. I feel that I must get a little ahead of myself again and delve into thi s a
little bit, before we proceed.
Scaling out of a position has nothing to do, per se, with trailing stops. One
can scale out of a position and not even know what a trailing stop is. And
one can use trailing stops on every trade, and not have a clue about scaling
out of a position. For me, though, I do both on pretty much every trade. The
reason has to do with an inherent limitation of trailing stops. Trailing stops,
by their nature, always give back some of the potential profits.
There is nothing necessarily wrong with this, because while these stops 'give
some back' , they are very good at maximizing the run, keeping the trader in
165
for the longest possible play. On balance, I have found the trade-off
worthwhile. On the other hand, my style is to take some profits at certain
technically significant points. Hence, I like to start to close out parts of my
trade when these points are hit and I see the action start to slow or reverse.
If I just closed my position in one shot, I would always be giving back the
amount from the peak to the trailing stop. When I started to experiment with
a fixed amount trailing stop, this really hit home. I was able to watch an
issue stall, and I was sure that that was it for the move. I then said to myself
' if you don't close now and that's it for the move, you will give back x
amount of profit' . Once I could see the exact numbers I was giving back, I
really started to wonder if that was the wisest thing for me to be doing.
So I started to c lose part of the trade at these significant points, and I also
continued to hold some. S ince that time, I have worked on and improved this
concept, refining it greatly to optimize it as best as I could. By combining
the two techniques, I feel that I find the best balance for my trading style and
'Trading Plan ' . For this reason, I mention the two as though they are
intricately linked together. They are l inked together in my trading plan, but
otherwise they have no true, inherent association.
Please take from this discussion the awareness that all trail ing stops, by their
nature, require you to give back some of the move in order to attempt to
maximize the run. If you try to second-guess the end of the run, you may
maximize some of your trades, but overall, you may also miss some big
moves. Traders have to decide for themselves how they want to manage
their trades. For me, I need trailing stops.
I really started to study the fixed amount trailing stops concept in my trading
with the NQ and ES intraday. It must be made clear here that my ' style' for
trading with these vehicles could best be described as ' intraday swing
trading'. There are no really good, standardized definitions for ' daytrading',
' swing trading', 'position trading' , ' short-term trading' , and so on. I will not
even attempt to define these here. What I will do is explain what I try to do,
so that the reader is clear on what my preferred moves look like on the chart,
and hence the proper context will be available to assess the material that I
am presenting.
I usually trade the 3 -minute chart as my traded timeframe. I find the setups
on the I 3-minute chart; hence this is my higher timeframe, context chart.
166
The I 3-minute has the patterns and things that I am looking for. When I see
something I like, I trade it using a 3-minute chart. I use the I -m inute chart to
help pinpoint my entry, but since the I -m inute is so choppy, I sort of
combine the I -minute and 3-minute to come up with an entry ' area' . I then
go back to the 3-minute and manage the trade.
I am trying to sit through all small pullbacks on the 3-m inute chart for my
'last exit, of many exits ' trailing stop. What do I mean by that? These small
pullbacks on the 3-minute chart are very prominent on the I -minute chart.
Each pullback usually comes after a thrust move. I will generally scale out
on every thrust and stall on the I -minute chart, and trail some for a final
close out on the 3-minute timeframe. Ultimately, then, some of my trade will
ride almost the entire trend that you can see on the 3 -minute timeframe.
It seems that many, many mini traders are trading off of the market depth
screen, trying to play the spread, trading tiny little momentum thrusts, and so
on. I have heard many of these type traders say that no way can someone sit
on a trend like I am describing, while it goes up 5, 1 0 or 1 5 points. I say it al l
depends on what the trading plan is for the trade. I see, on average, one to
three moves per day in the mini (at this time; it may be radically different in
the future) that can be characterized best by the 3-minute trend. There is no
reason that I can think of why a trader can't target those 3-minute trend
moves, or 3-minute trend ' swings' as they could be called.
I ' m pointing this out now, so that it is clear that the skills that one uses to
' intraday swing trade' a mini, for example, are totally different than the
skills to ' scalp' or ' spread trade' a mini. The same thing applies to
' daytrading', as it is sometimes defined. I can ' daytrade' a liquid issue all
day long without ever looking at a Level II screen, and I can ride out small
pullbacks and stil l find the reward/risk favorable for my trading. Thi s i s
because I am trading off o f the chart, and playing the ' swings' . Don't
confuse what it i s that you are trying to do, and what the moves are that you
are trying to catch.
Let's get back to my study on the minis. I found that the 3-minute chart
moves that I was tryi ng to catch, at a given point in time, had fairly
consistent sized ' small' pullback maximums. What I mean by this is that
although these sizes changed over time, on any given day I could look back
over the past few weeks of trading, and get a very consistent idea of how big
the biggest pullbacks would be, in the trends that I was trying to catch. From
167
a probability standpoint, I could use this information to determine a trailing
stop for the play.
I have to make it clear here, my game plan does not call for me to
automatically give back this amount on every trade. The closer the trend
move gets to the statistically determined average trend move, the more
aggressive I get at scaling out. When a trend gets extended far beyond
average, my trailing position is getting smaller and smaller. I ' m taking off
parts of the trade every time I get another thrust.
I have actually played some trades that went really well, with me scaling out
as the oversized move played out, and I ran out of ' inventory' before my
remaining trail could even be hit. The move continued, and I had nothing
left! This can happen to you if you get one of those rare seventeen thrusters,
or even quite a bit before that.
So, when looking at the ES back in September of 2002, for example, I found
that j ust about all the pullbacks that I would consider ' smal l ' , and not
significant enough to change the direction of the 3 -minute trend, were about
4.25 points or less, with an occasional 4.50 or 4.75 point pullback. So I set
my trailing stop for j ust a l ittle bit more than the 4.50-4.75 points, at 5 .00
points, to add a l ittle ' cushion' .
Understand that thi s was my own personal interpretation o f what the

pullbacks were like for the 3 -minute trends I was trying to play at that time,
based on my own game plan. You may look at the chart and quantify the
pullbacks differently. This can be a very individualized process.
1 68
Let's look at a few trends, and how this applied to the trading of these
trends. See figure 7. 1 .
Figu re 7 . 1
?. E S 02Z 3-1 I!!I El l3
j j f )! Ijl II ){lrjtjj
tj ti t
. 1� 111 J {J
�t } r
Pot e nt i a l
Tra d e Are a
71
F or the sake of this example I ' ve labeled the chart with a potential trade
area, and drawn a simple trendline trigger that may have gotten a trader into
a trade here. This is not an exact entry trigger line, just a general guideline so
the reader can get an idea of the approximate area where a trader may have
gotten into this trade, based on the highlighted potential trade area. Each
trader would be deciding on his or her own, in a case like this, what, if any,
entry triggers to use.
169
Let's assume the trader is now long and seeking to maximize the run, using a
S .OO-point trailing stop. I ' l l add some more data onto the chart, and we' l l
assess the situation. See figure 7.2.
Figure 7.2
67.000
66.000
65. 000
) ttl tll l j lj )
64.000
63.000
62 .000
6 1 .000
. PI p Jjl
60.000
59.000
P ot e n t i a l 71
Tra d e Area
58.000
57.000
The trade started off really strong, and now is pulling back very
aggressively. If I didn't have a very clear idea of what I would and would
not sit through, I might panic out of the trade at this point.
170
Let me add an exit trigger l ine exactly 5 .00 points off that last top. See figure
7.3 .
Figu re 7.3
?. E S 02Z 3·1 !IS £J
67.000
66.000
65.000
j! Ijt I I j ll l j lj )
64 .000
f
63.000
I
62.000
6 1 . 000
Ij lt�lJ JIJtl
60. 000
59.000
P ot e n t i a l 71
Tra de Area 58.000
57. 000
1 ' 1 1 now move ahead in time and see if this horizontal exit trigger l ine is hit,
or if the ES turns and heads back up. See figure 7.4.
17 1
Figure 7.4
+) 1)1
72. 000
70. 000
i f -
68.000
) 11 � f 1 I I
I
66. 000
64. 000
tt tt
ft+ l! ItJ
60. 000
�
P ote n t i a l
58. 000
Tra d e Area
r
The ES turned right up from the point shown on that last chart, not even
threatening the trigger l ine. There has been one very small pullback on the
way up, but that one was way too small to even put a trigger line on for it.
The ES has started to pull back a bit off of this last high, so I have added a
horizontal exit trigger l ine 5 .00 points below the high.
172
I ' ll add some more data onto the chart, and we'll see if we get an exit signal
here, or if the ES continues the trend up. See figure 7.5.
Figu re 7.S
?. ES02Z 3-1 !lEI £i
l�
78.000
tlj)l !
)�
76.000
74.000
72.000
ita�n j U
70.000
68.000
Jit
)
66.000
�tt
t 64 .000
62. 000
Again, the ES didn't even threaten the trigger line. Another pullback has
started, so I ' l l repeat the same procedure, and add the horizontal exit trigger
line 5 .00 points below the last high. See figure 7.6.
173
Figure 7.6
Now I just wait and see if another thrust up will ensue, or the exit trigger
will be hit. I ' l l add two more price bars onto the chart, and we' ll assess the
situation. See figure 7.7.
174
Fig u re 7.7
?. ES02Z 3·1 !!lEI £J
The exit has now been triggered. It only takes one trade below the l ine to
trigger the exit, so there is no waiting for a price bar close or anything of that
sort. Although it may be a legitimate and useful variation for some traders to
use this technique with a price bar close, I feel that somewhat defeats the
design of the technique. I point this out here because I stil l feel that it is
important to note that i f a reader wants to experiment with variations
involving bar closes, I think he or she should pursue that.
175
Let me add three more price bars onto the chart, and we' ll see what is
happening after this trigger has been hit. See figure 7.8.
Figure 7.8
78.000
76.000
74.000
72.000
70.000
68.000
66.000
64.000
62.000
60.000
58. 000
Wel l, I ' m wondering if we just got shaken out, the old headfake. The last bar
is a doj i with a somewhat long upper tail, so this may also be the final thrust
up that fails to set a new high, and down it goes. It' s nearly impossible to
make any sense out of a 3-minute bar on something as choppy as the mini is
in this timeframe, but I always look the bars over, j ust to see if there is
anything to be gleaned from them.
176
I ' ll add on a lot more data, and show how it played out. Any thoughts? If
you took this exit trigger, would you have any seller's remorse at this point?
See figure 7.9.
Figu re 7.9
?: ES02Z 3-1 I!GU3
75.000
70.000
j
65.000
utl�Ityt '1i
Potent i a �
60.000
Tra d e Are a
55.000
19t
Chart created by Dynamic Tr ader (c) 1 996-2001
That was indeed it for the 3-minute uptrend in the mini. What was your
answer about the seller's remorse? I hope it was no, and I hope it would
have been no, even if the mini was up another twenty points here. You can't
regret getting shaken out or closing a position, ifyou 've followed your well
thought out game plan. Sometimes chance will have it that you will get
taken out by one tick, and then the move will continue. That's trading.
If you chose your stop as good as you feel that you can based on your
studies, no matter how you construct it, every so often you will get taken out
by one tick when it would have been better if you hadn't gotten hit. Don't
change your entire game plan based on such occurrences. Think about all the
times, like in this example, when the stop, or any aspect of the plan, did a
superb job at getting you in, or out, or whatever, in a truly great area. Think
probability, not individual cases.
177
Let' s finish this example with a look at the chart with a 2 1 -period simple
moving average on it. This is an average that I sometimes use for a trail ing
stop when trading the mini with a 3 -minute chart. See figure 7. 1 0.
Figure 7. 1 0
?: E S02Z 3-1 I!!IS E'I
Tra d e Area
It's interesting to note that the average didn't trigger in the same bar area as
the fixed amount trailing stop. The average didn't trigger until after the first
pullback in the new downtrend was over and the next thrust in the
downtrend had started, as you can see on the chart. If a trader waited for the
close of that last bar to accept the exit signal, the price wouldn't have been
nearly as good as with the fixed trail . On the other hand, if the trader had
chosen to exit on j ust a price cross, the exit would have been just about
identical .
I ' ll show one more example in the mini, on the 3 -minute timeframe. This
example occurred in November 2002, and at that time I feel that the trailing
stop was working better around 4.50 points, just a bit tighter than back in
September. This is a dynamic process, and i s ever changing and updating.
Interestingly, about a year later, with the ES trading approximately 20%
178
higher, I ' m seeing the range of the pullbacks at from 2.25-2.75 points for my
trends, and the volatility index at very low levels, relatively speaking.
Let's start with a downtrend that we' l l assume the trader has gotten on
board. I ' ll also add the 2 1 -period simple moving average onto the chart, for
comparative purposes later on. See figure 7. 1 1.
Fig u re 7. 1 1
:.� ES02Z J-I ' 1!8 l'!'J
At this point the procedure is straightforward, just like in the last example.
The only difference now is that we have a downtrend this time. Every time I
see a pullback get underway I draw in a horizontal exit trigger line, exactly
4.50 points above the low bar in this case. I keep doing this until I ' m hit.
179
I ' l l move ahead, and just show how thi s played out. See figure 7. 1 2 .
Fig u re 7. 1 2
I)l n<li 92.000
{I J}t ) ttL
1j tI p +J t l t
, Ij
1
90.000
t
I
lp
88.000
rlill! 1 { Hi ltH
86.000
l r
84 .000
1
lIltll
82.000
80.000
l r{
78.000
76. 000
74 .000
72.000
There were only two places where I had to draw in the trigger lines. The
second line was hit. This is a very easy technique to apply. In fact, some
electronic trading platforms allow a trailing stop to be put in automatically,
and you can just tell it the stop amount, and it will trail it for you. I prefer to
do it 'by hand' , because I like to make decisions as the price action unfolds,
and also, as I mentioned, I just about never use a single trailing stop alone. I
scale out with multiple techniques at multiple spots. But perhaps for some
traders this option may be useful.
180
I ' ll move ahead to the point where the moving average exit trigger was hit,
so we can make a comparison. See figure 7. 1 3 .
Figure 7. 1 3
?: ES02Z 3-1 1!!18 13
The moving average, again, didn't give quite as good of a price as the fixed
amount trailing stop, but it is still pretty close. I never cease to be amazed at
how two such disparate techniques can point to such a very close area.
18 1
I ' ll add in a lot more data, and show how this one played out. See figure
7. 1 4.
Figure 7.1 4
?: ES02Z 3-1 " " I!!IB EI
14t
Both of the exits did, in fact, take the trader out as soon as the pullbacks
were no longer ' smal l ' , and the 3 -minute timeframe trend was over. The
fixed amount trailing stop ' did its j ob ' , and in my opinion, it did it quite
well .
Keep in mind, as you think about these two examples in the 3-minute ES,
that this technique can, in my opinion and experience, be applied to any
timeframe. I have used it on weekly charts. I chose the ES on the 3-minute
timeframe because I am very familiar with it, and I can determine very
quickly,jor my trading, what the amounts for the trailing stops should be.
This makes it easier for me to demonstrate what I think are relevant
examples.
I could have chosen some other examples on other timeframes, but I would
have had to ' figure out' the trailing stop amounts, as opposed to just
182
knowing them off the top of my head. I don't have any idea, for example,
what amount to use with MSFT on a 60-minute timeframe. If I traded MSFT
regularly on the 60-minute timeframe, though, you can bet 1 ' d know it. I just
want the reader to be clear that I feel this technique is valuable with any
issue on any timeframe, as l ong as relatively consistent pullback amounts
can be determined.
Overall, what I am trying to show here is the importance of knowing what

you are trying to accomplish in your specific trade, so that you can then
' choose the right tool ' for each aspect of the trade, from potential trade area,
to entry trigger, to management, to exit strategy, and so on. Knowing what
you want to do in each and every aspect of the trade allows you to find the
pieces that suit your needs as best as possible, and those needs may vary
from trade to trade, day to day, and market to market.
In the next chapter I wil l explore a very unique concept, one that is not
commonly seen in the l iterature. I wil l delve into using Fibonacci
retracements to determine the amount to trail the stop by. The concept will
be very similar to this chapter, in that the exit will be triggered when a
certain amount of a move is 'given back' from the most recent new high or
new low. But instead of using past ' statistical' price behavior to determine
that amount, as we have in this chapter, we wil l use Fibonacci retracements
to tell us the amount.
183
Chapter 8
Fibonacci Stops
The concept of a Fibonacci stop is not one that you will encounter with any
great frequency. I have experimented extensively with this idea, since
Fibonacci trading is one of my ' specialties ' . Although I have found some
interesting, and in my opinion quite incredible, things, I still feel as though
the other techniques that we have covered in this book are easier for me to
apply, and overall, work better for my trading.
I want to present some of my better thoughts on the topic, though, as food

for thought for the reader who is inclined towards the use of Fibonacci
numbers in trading. This chapter will only make use of simple internal
retracements; hence, it should be fairly easy for readers who are not very
familiar with F ibonacci trading to follow.
I first started looking at Fibonacci stops after lengthy discussions with Scott
Carney over at Harmonic Trader. At the time I was heavy into Elliot wave
analysis. One of the things I had noted was how a wave 4 correction very
commonly retraced back to a .3 82 retracement, sometimes of wave 3 , or of
the whole move, from the start of wave 1 . I was seeing this over and over,
and using it in my trading.
Scott and I were discussing this, and soon after he started developing the
concept of using a . 3 82 retracement trailing stop for his pattern trades. The
idea is that once the trend was established, if a wave 4 unfolded, it likely
wouldn't exceed a .382 retracement of the move up to that point, and hence
if another wave (wave 5) is going to start, it will likely start without
exceeding the .382 retracement. This would keep the trader in for another
major thrust move.
I experimented with the . 3 82 retracement as a trailing stop, but I wasn't able

to get consistent enough results to incorporate it into my trading plan. I also
found an aspect of the use of this stop, which I ' l l explain later, that I didn't
like. I started to try other Fibonacci numbers, and to key off of other points
beside the trend origination point. I saw some startling things happen right at
Fibonacci numbers, but, again, it was hard to get the consistency I was
looking for. I find the F ibonacci numbers invaluable for finding potential
185
trade areas, but I have not been able to apply the process ' in reverse' to find
the best exit points solely with Fibonacci numbers. I believe it can be done,
but I just haven't figured out yet how to do it.
I prefer the methods outlined in the rest of this book, combined with some
scaled exit techniques, for exiting trades. Nonetheless, I will make a brief
presentation here of some of the things that I have looked at that show some
promise. Perhaps one of the readers of this book will be the one to put
together the pieces that I haven't been able to so far, and find a better way to
use Fibonacci stops.
I'll start out by showing what a . 3 82 retracement trailing stop would look
like. I must point out right away, though; this is not a technique that you
would use when trying to catch a trend in the ways that I have shown so far
in this book. I keep a fairly 'tight' stop on my trades, in the sense that I try to
trade individual thrusts, and get out when the thrust starts to correct. I may
sit through ' smal l ' pullbacks, but I don't like to sit through anything I deem
larger than ' smal l ' . It is very common for the pullbacks that I want to avoid
to pull back right into the . 3 82-.447 retracement zone.
Readers familiar with Kane Trading on: Advanced Fibonacci Trading

Concepts know that this retracement area is my favorite area to look at in a
strong trend, to construct groupings against which I trade. This is not a
coincidence. I like to trade the moves between these types of groupings.
Hence, for me to sit out a move that retraces back to a . 3 82 would not be in
most of my game plans for trades.
That is not to say that there aren't legitimate game plans that do include
sitting though such moves, because there certainly are. I ' m j ust saying that 1
don't usual ly do it, with most of the trading that I do. That is a big reason
why the . 3 82 retracement trailing stop doesn't help me very much. It may
work great for you, though. Perhaps your plan is to sit through pullbacks that
are greater than ' smal l ' , and go for the much longer moves. In that case, the
. 3 82 retracement trailing stop, or a variation of it, may be of great service to
you.
186
Let's go back to the daily chart on S, which I showed in an earlier chapter as
an example of various trends. B efore I start an explanation, I ' ll show the
chart so we can refresh our memories. See figure 8. 1 .
Figure 8.1
0.000
5 . 000
0 . 000
35 . 000
30 .000
25 .000
20 . 000
Dec 03 Feb Mar Apr May Jun Jul Aug Sep Oct
S started a long, strong trend from the area on the chart marked by the arrow.
The arrow also points to a potential trade area, based on a pattern and the
F ibonacci grouping technique. I ' ve included data to the left of the arrow to
show some of the structure that was used to form the potential trade area.
The assumption here is that a trader has gotten long the stock somewhere in
the area of the potential trade area, marked by the arrow, or just above that
area. The trader wants to explore the use of a . 3 82 F ibonacci trailing stop,
and possibly other F ibonacci stops.
187
1 ' 1 1 zoom in on the chart, and look at the first thrust up from the potential
trade area. See figure 8.2.
Figure 8.2
?:: S D-D d " I!B EI

29 . 000
28 .000
27.000
26.000
25 .000
24.000
23 .000
22 .000
2 1 . 000
20. 000
1 9 . 000
14 21 23 Mar 14 21 213 Apr 11 17 25 May 9 15

S has made a solid move up off of the potential trade area, and is starting to
pull back. It should be clear to the readers by now, without putting anything
on the chart, that I would be exiting the trade, or would have exited the
trade, by now. If your eye isn't quite convinced of this, let me put a 25-
period simple moving average on the chart. See figure 8.3 .
188
Figure 8.3
)} I I) [1 r1tl),Jl t:lrrH
29 . 000
t1 l}
28 . 000
Httl!
27 . 000
26 . 000
HI
25 . 000
Jt
24. 000
f 1+tf)lj1l �
23 . 000
22. 000
lIlt ll1l )
2 1 . 000
20. 000
1 9 . 000
+-
14 21 23 Mar 14 21 23 Apr 11 17 25 May 9 16

I ' m not implying that I would have chosen this particular technique or
moving average for use in my trading, if I were in this trade. I just want to
show a middle of the road technique here, to demonstrate that regardless of
the technique that I would have chosen, if I were trying to catch single
thrusts and not sit through any pullbacks larger than ' small', as we have
come to understand the term, I would be out of the trade at this point.
The assumption is that the trader wants to sit through pullbacks larger than
what I term ' smal l ' , and really try to maximize this run. On this timeframe,
this would be a longer-term position trader. This does not mean, though, that
the techniques that we are about to cover cannot be applied in the same
manner on lesser timeframes, because I feel they can be. I j ust have to
choose a timeframe for each example, and in this case I chose a longer one.
189
I ' l l remove the moving average, because we won't be using it here. I ' ll also
add in a .382 internal retracement from the low to the current high. See
figure 8.4.
Figure 8.4
29 . 000
28 . 000
27 . 000
26 .000
----- 25.0 11 Ret 0.332 25 . 000
24 .000
23 .000
22 .000
21 .000
20 .000
19.000
21 28 Mar 14 21 28 Apr 11 17 25 May '3 if,

The idea here i s that the trend wil l reassert itself before breaking the .3 82
retracement of the move that has ensued so far. I ' d l ike to note that thi s
seems l ike a very big 'give back' t o m e . Almost undoubtedly, any trader
attempting to use this technique would have scaled out of some of the
position after a move l ike this, and is planning to trail the remaining amount
for a bigger move. In this context, such a wide stop doesn't seem so
unrealistic.
The .382 at this point i s $4. 1 8 away from the current high for the move. This
is a 1 4.3% 'give back' , as a percentage of the price off of the peak. This
calculation will be important later.
190
Let's move on, and see how S reacted after this point. See figure 8 . S .
Fig u re 8.5
�-:: S D -D I!!I3 £I
36 . 000
34. 000
32 . 000
30 . 000
28. 000
26. 000
------ 25 .0 1 1 Ret 0 .382
24. 000
22 . 000
20. 000
14 21 28 Mar 14 21 28 Apr 11 17 25 May 9 16 23 30 J

S didn't even make it back to the .382 retracement before starting another
thrust up. As an aside, this can imply that the trend is very strong. It is not
uncommon for the first retracements in a new trend to pull back to the . 6 1 8
or even the . 786 of the first thrust. A new trend that goes as far as this trend
did on a first thrust, and then can't even retrace back near the .382 before
starting a strong new thrust up, is showing tremendous strength.
191
At this point I ' l l move the . 3 82 retracement up to the next peak on this chart.
See figure 8.6.
Figure 8.6
36 , 000
34 ,000
32 ,000
30 ,000
28 ,000
26 ,000
------ 25 .011 Ret 0.332
24,000
22,000
20,000
14 21 28 Mar 14 21 28 Apr 11 17 25 May 9 16 23 30 J

It's curious that the . 3 82 retracement off of the new high falls pretty much
right on the last peak. It' s also interesting to note that the retracement is now
$6.80 from the current peak. Thi s would be an approximately 1 8.9% 'give
back' , based on the price of S at the current peak. That's greater than the
amount of 'give back' from the last calculation.
192
I ' l l add in some more data, and we' ll see how this is progressing. See figure
8.7.
Figure 8.7
36.000
34.000
32 .000
30. 000
28.000
26 .000
------- 25.0 11 Ret 0.382
24.000
22. 000
20 .000
Mar Apr May Jun Jul

S is just range-trading sideways here, but well above the . 3 82 retracement.

The range is getting tighter, though, and it is looking very bullish to me. If I
had to guess, just for fun, 1 ' d say this is likely to explode up from here.
Some technical analysts would call this a symmetrical triangle, or a 'coil ' .
Many analysts say that the odds on the direction of the ' breakout' are fifty
fifty; I don't tend to agree with that. To me, S is in bull mode here, and I
strongly doubt the trend i s going to end with a breakout to the downside
from this 'triangl e ' .
193
Let's move ahead, and see what is happening. See figure 8 . 8 .
Fig u re 8.8
5 . 000
0.000
35 .000
.--::---:-1'-"-- 29.250 Ret 0.382 30 .000
------ 25.0 1 1 R�t 0 .382 25 .000
20 . 000

S broke upward from that 'triangle ' , and it j ust keeps going up. At least four
thrusts are now visible in this move, with relatively small pullbacks between
the thrusts. Although these pullbacks are larger than I l ike to sit through,
they appear, to me, to be smaller than what I usually see between thrusts. In
fact, after the initial pullback used for the first retracement, none of the
subsequent pullbacks have been able to get the 1 5 , 3 , 5 stochastics (not
shown) back down to the lower band. This i s a strong trend.
194
I ' ll add in the .3 82 retracement off of the new high on the chart. See figure
8.9.
Figure 8.9
5,000
0,000
, .-------f- 35,91'3 Ret 0 .332

35 ,000
30 ,000
.----J'--=--- 2'3,250 Ret 0 .382
------- 25,0 1 1 Ret 0.382 25,000
20,000

Hmmm, I guess that's another coincidence. The .3 82 retracement has, again,

landed right on the horizontal l ine from the previous peak. Like I said, I 've
seen some amazing things when I experiment with F ibonacci numbers. And
again, it is interesting to note that the retracement is now $ 1 0.92 off of the
current peak, which would be an approximately 23 .30/0 'give back' from the
peak. To me, that is getting out of control.
195
Let's move ahead, and see what happens. See figure 8 . 1 0.
Fig u re 8. 1 0
::.-:: S D -D ' ' !IS £I
I�--;---t--- 35.919 Ret 0.382

35 .000
r-;;--.JC--- 29.250 Ret 0.3132 30 .000
------- 25 .011 Ret 0 .382 25 .000
20. 000
Mar Apr May Jun Jul Aug Sep 0ct

Again, not even close to the .3 82 retracement trailing stop. So, what finally
happened with this one? I don't know; it' s ongoing as of today. The last bar
on this chart shows the data from the very day I am writing this. I will be
watching this one, for sure, as it continues to unfold.
Now comes the thing that I don't l ike about what we have just done. Notice
what is happening to the stop. It is getting larger and larger, as the move
continues. The first retracement I calculated was $4. 1 8 from the peak at that
time. Then it became $6.80, and then $ 1 0.92 . This is because the
retracement is a fixed percentage of the total move. If the move gets larger,
the retracement amount gets larger. I see this as a big problem.
My tendency is to 'tighten up' my stop as a move becomes more and more

'outsized' . The more a move goes, the smaller I want my stop to be, not the
larger. Granted this is a very ' outsized' move, but what if you were on
board? I f you did get ' lucky' enough to catch this move, you would real ly,
196
really want to optimize you play. I don't think a stop that gets wider and
wider is the answer.
So, then, what is the answer? Well, I look at this in two ways. One way is to
simply abandon the Fibonacci stop technique, and use the other techniques
that I have outlined in this book. For the most part, that is what I have done.
The other way to look at it is to modify the Fibonacci technique in some way
to make it better. I have done that, and done a lot of experimenting with
every variation that I could come up with. I will present two variations here,
and then simply leave it to the reader to decide if there is anything of value
to him or her in what I have shown.
I will first show a fairly mathematical variation on this . 3 82 retracement

trailing stop, and then I will show a completely different way to possibly
utilize the concept of a F ibonacci trailing stop. I must warn the reader, this
next example will be very mathematical. I will use nothing more than high
school math to do the derivation, but if you don't like equations, and don' t
like to try and follow the logic o f following a mathematical derivation,
perhaps you might want to skip this part and just go to the second variation.
For those who like math and want to follow along, I think that you'll find
this fascinating. I am only going to show you one of the literally hundreds of
things that I have found experimenting with Fibonacci numbers in trading. I
strongly encourage those who have an interest in this type of work to pursue,
like I have, new possibilities for the use of these numbers.
I ' ll start with what I was thinking when I concluded the non-changing .3 82
retracement trailing stop was just getting wider and wider. I thought that, for
example, in this study on S, that the original 1 4.3% 'give back' might not
have been that bad of an amount. Perhaps I could just run a 1 4.3% trailing
stop, based on the new high prices, as they formed. This 1 4.3% was the .3 82
retracement amount of the original thrust, figured as a percentage of the
current price.
As long as I felt that this original thrust was a fairly representative thrust for
such a trade, this technique might be pretty good. It turns out that, in my
opinion, it is. It would still have the trader in the trade. After this, though, I
still wanted to see if I could come up with a modified F ibonacci trailing stop.
I looked at the next smaller Fibonacci numbers down from the .382. The
197
next numbers in line are .300, .236, and . 1 86. All of these numbers can be
derived directly from <1>, the Golden Ratio (= 1 .6 1 8).
I started thinking that as the move continued, I could simply use a smaller
and smal ler Fibonacci retracement. The problem was when do I want to
switch to the smaller retracement? To make a long experimental process
short, I ' ll j ust give you the punch line. I decided that I l iked that original
1 4.3% that was determined from the original .382 retracement. At the point
where the next retracement in line, in this case the .300, would be a 1 4.3%
' give back', I ' d switch to that retracement.
When the move reached the point, then, that a .23 6 retracement would be a
1 4.3% 'give back' , I ' d switch to that retrace me nt, and so on, right down the
line of Fibonacci numbers. But how would I know when that point was? I
devised a simple algebraic equation to tell me where that point would be.
Here ' s what I came up with:
P * ORA = (P - SPT)R
where:
P = price where the new retracement equals xx.x% (determined from the
original .382 retracement amount) 'give back'
ORA = Original Retracement Amount, determined from that first .3 82
retracement, in decimal form
SPT = Starting Price of the Trend
R = new Retracement
Now this may seem confusing, but perhaps it will be less so when I apply it
to this particular S example. Here ' s what it looks like with the current
example.
P * . 1 43 = (P - 1 8.25)R
Let' s try this for the .300 retracement:
P * . 1 43 = (P - 1 8 .25).300
198
I'll do a little rearranging to make this look better:
. 1 43P = .300(P - 1 8.25)
I'll multiply out the right side :
. l 43P = .300P - 5.475
I ' ll skip the simpler final algebraic steps here, and just go to the solution:
P = 34.87
I will leave it to the reader to confirm that at this price, a .300 retracement
will be a 1 4.3% 'give back' .
This equation can now be used for the other retracements, to determine at
what point the stop should be changed to those retracement values. Here are
the results, having spared my readers the agony of the details of the
calculations :
Retracement Price
.300 $34.87
.23 6 $46.3 1
. 1 86 $78.94
This says that when the price hits $34.87 the retracement stop is moved to a
.300 retracement, off of each new high price bar. When the price hits $46.3 1 ,
the stop becomes a .23 6 retracement off of each new high price bar. And
finally, when the price hits $78.94, the stop becomes a . 1 86 retracement off
of the new high price bars.
Understand that as the price moves up after the retracement stop number has
been changed, the same problem we had with the single .382 retracement
stop starts to happen all over again. The stop is 'getting wider' as the price
goes up. It' s just that before it gets too out of control, at some point further
up in price, a new retracement stop number will ' stop the bleeding', and get
the stop percentage back to the 1 4.30/0. Keep in mind that this 1 4.3% number
is specific to this particular example, and will vary for each and every trade
on different issues, and in the same issue at a different period in time.
199
I can't say whether all this is worth the effort, but it i s a very interesting way
to do a Fibonacci trail ing stop, and I ' ve never seen any work demonstrating
anything like thi s at all. I hope that some readers wil l see what they can do
with this, and perhaps take it to the next level . I don't use this very much in
my trading, but I do think it has some potential for certain trading plans.
I'll finish this example with a chart showing the trailing stops, as they would
appear on the chart. I can't show the trail ing stop on every new high bar or it
would just be a j umbled mess, so I ' ll show them on j ust a few of the more
noticeable peaks. In reality, you would keep moving the retracement up, as a
new high for the move i s set. See figure 8 . 1 1 .
Figure 8.1 1
0.000
5 . 000
----- 40.0'33 R�t O .23b 0.000
35 .000
1'[1"' ------ 34.315 Ret 0.300
------- 30 .7 10 Ret 0.300

30 .000
25 .000
20 . 000
Apr May Jun Jul Aug Sep Oct
The current retracement stop is at a .236 retracement, and it comes in at

$43 .00, which is $7.65 below the current high for the move. This would be a
1 5 . 1 % ' give back' . Notice how the percentage i s already creeping up, since
S is now above the point, at $46.3 1 , where we switched the stop to the .236
retracement.
200
I'd like to point out that this formula works exactly the same for downtrends.
The only thing different is that you must add in the ORA, the Original
Retracement Amount, as a negative number. If you do that, the application
of the formula is straightforward and works quite well.
I'll finish this chapter with the other way that I deal with the issue of a
Fibonacci trail ing stop. This is a technique that I actually do use from time to
time. This time, we' ll forget about where the trend started, and just look at
the last swing move. We' l l key retracements off of the last swing move, and
only take that move into account when formulating our stop.
I decided to try this idea after looking at many references to placing stops
'j ust under the previous swing-low point (or swing-high point for shorts)' .
The idea i s that i f the trend i s to continue, it won't take out any previous
pullback swing points. I feel that there is merit to this concept, but I also feel
that it 'gives back' a lot.
I decided to look at the behavior near these swing points in trends, and I
discovered something interesting. I found a way that I can ' shave off a bit
of this 'give back', and still stay within the spirit of the concept. I noticed
that many of the pullbacks retraced very close to a .6 1 8 retracement of the
last thrust. I also noticed that the .6 1 8 retracement was frequently exceeded
by just a small amount before the pullback ended and the trend resumed.
This made the .6 1 8 retracement an impractical choice for a stop point.
I decided to use the next Fibonacci value, the . 786, as an experimental stop
point. I have found this to work quite well in my trading. The downside is,
you are giving back just over 78.6% of the last thrust move. Again, it
becomes a trade-off between how much one is willing to 'give back' from
the high of the move (or low of the move for shorts), to have a better chance
at riding the move out for additional thrusts. This is a decision that must be
made individually, based on a trader' s individual situation and 'Trading
Plan ' .
Let's look at a few examples showing this technique. I ' d like to point out
that I prefer to use this technique where the swings are quite noticeable,
perhaps even overlapping, as opposed to a steady, maybe even grinding
trend, which then rests for awhile and then resumes. The S example would
actually not be a case where I would use this variation.
20 1
Most of the thrusts in the S example are not retracing back anywhere near a
.6 1 8 retracement. In fact, most are not even hitting the .500 retracement area.
Nonetheless, the technique could be applied here, and would have stopped
the trader out on September 9. The price trigger would have been a trade
below $43 .05 . After I show the examples with this technique variation, I ' ll
finish with a chart showing this stop exit in S . This way it will make more
sense, having already seen the technique a few times as it unfolds.
Let's go back to the C example from Chapter 5 . I ' ll show the chart that was
in Figure 5 .50, to refresh our memories. See figure 8 . 1 2.
Fig u re 8 . 1 2
26 Jun '3 16 23 30 Jul 14 21 28 Aug 11 18 25 Sep

Here we had used the hybrid regression channel technique for a trailing stop,
and we also had a 25-period simple moving average on the chart for
comparison purposes. I ' m going to apply the . 786 retracement trailing stop
to this same example. What I will do is put a .786 internal retracement on the
chart every time a pullback starts, as long as a new high for the move has
been set.
202
Understand that you will have to do these retracements, in real life, as they
unfold, not in retrospect. I will scroll the chart back and show, as best as is
possible, what it would look like as the process unfolds. First, though, let me
put some arrows on this chart to show where these retracements are going to
come into play. See figure 8 . 1 3 .
Figu re 8 . 1 3
9.000
8 . 000
7 . 000
6 . 000
5 . 000
4 . 000
3 . 000
2 . 000
1 . 000
0 . 000
9 . 000
8 . 000
7 . 000
6 . 000
5 . 000
23 30 Jul 14 21 28 Aug 11 18 25 Sep
Chart created by Dynamic Tr ader (c) 1 996-2001
As each of these pullbacks unfolds I will be waiting, with the . 786

retracement already on the chart. As soon as the pullback starts I can go
ahead and set up my retracement. If the pullback doesn't proceed very far
and the trend resumes, I just delete off the retracement and wait for another
pullback to start.
The most important thing for me is to only start a new retracement when a
reasonable new high for the move (or new low for shorts) has taken place.
The first three arrows, counting from the bottom left on the chart, show the
type of new high for a thrust move that I am talking about, making those
three pullbacks good for this technique. The last arrow shows an example of
a pullback from a thrust that does not set a very good new high.
203
Sometimes just a very nominal new high will be set, and at times I ' ll stick
with the last retracement stop value if the thrust isn't a significant one. It
becomes a judgment call what to do in cases like that. We ' l l look at that a
little bit more in a moment.
I ' l l start here by scrolling back the chart some more, and looking at the first
place where I ' d draw in a retracement stop. See figure 8 . 1 4.
Figu re 8 . 1 4
)IjI1j
4 , 000
3 , 000
2 , 000
I1IJ1jJ
1 , 000
�
� ��
+
0,000
.-// 9,000
1j
---- 8 , 000
ll
---/
7 , 000
5 , 000
23 30 Jul 14 21
Here ' s the chart in the very early part of the trend. A pullback is starting, so
at this point I would go ahead and put a .786 retracement on the chart. I am
going to key off of just the last thrust move, starting from that last pullback.
Although I have left the hybrid regression lines on the chart for future
reference, understand that at this point in the trend those lines would not be
avai lable quite yet. I am leaving them on the chart so that I don't have to
regenerate them again later. See figure 8 . 1 5 .
204
Figu re 8.15
fhU
4 , 000
t
3 , 000
2 , 000
1 j 1 )
j )
1 . 000
J
so ,05& Ret 0 ,78b
1 t
[I
�
23
1)
30 Jul 14 21
The .786 retracement area looks like it will converge with the moving
average at about the same time that the price action would get down to that
area, if the price action headed pretty much directly there. This is, perhaps,
trying to imagine a bit too much of the future. I 'm trying to point out,
though, that it appears that the average and the retracement techniques are
going to point, once again, to just about the same area.
205
Let's move ahead a bit in time on the chart, and see what is happening as we
approach the retracement stop. See figure 8 . 1 6.
Figure 8 . 1 6
4 . 000
3 . 000
t ! j J t t j�
2 . 000
1 . 000
SO .O� R" O.786 0.000
j �/
Y
9.000
8 . 000
/
7 . 000
6 . 000
/"
23 30 Jul 14 21 28
C is dropping right towards the retracement line, but has thrown a price bar
with a fairly long lower tail. It is very possible that this bar has set the low
for the pullback, and a new thrust move up has already started.
206
I ' l l add a bit more data onto the chart, and we' ll assess what we see
happening. I ' ll also add back the first arrow onto the chart, as was shown in
figure 8 . 1 3 . This arrow points out a significant area, worthy of some
discussion here. See figure 8 . 1 7.
Figu re 8 . 1 7
) fh u I d j �/
j
I
t}Ij )� l - SO.OSG Ret 0 .78&
23 30 Jul 14 21 28 Aug
C did reverse after that bar with the lower tail that I noted, but not before
setting a nominal new low for the pullback. What really stood out to me on
this chart was the convergence of the moving average and the retracement,
right at the time when the price action, at the pace it was going, would have
made it to that area.
The two techniques converged right at the same time and same place,
directly in front of the price action, right in the area where the arrow is
pointing. And then the price reversed sharply, and went up to set a new high
for the move. I simply do not believe that this was just random price action. I
have seen this more times than I could ever count.
207
With a significant new high on the chart, it' s time to key another new .786
retracement trailing stop. I ' ll leave the old retracement on the chart for
reference purposes. In practice I would delete the old retracement off when a
new one is added, to keep my chart uncluttered. I will, however, delete off
the two lines that show which swing-points were used to create the old
retracement. See figure 8 . 1 8.
Fig u re 8 . 1 8
lflll
5 . 000
)fhU1 t{t
4 . 000
,/-
3 . 000
+1{tI)r)
2 . 000
5 1 .661 Ret 0.736
1 . 000
SO.OS€. Ret 0.736 0.000
9.000
IV
8 . 000
7 . 000
6.000
5 . 000
23 30 Jul 14 21 28 Aug
This lastest .786 retracement is quite a bit lower than the moving average,
and the disparity wil l increase as the average rises. It will be interesting to
see, as this one unfolds, how the price action in C develops with respect to
the average and the retracements. I ' d also l ike to note that the 'hybrid'
regression lines on the chart have now actually been generated, at the point
we are at on this chart. We can now use them in any evaluations we make, if
we choose to.
208
I ' l l add a bit more data onto the chart, and we' l l evaluate. I ' ll also add the
second arrow that was shown in figure 8 . 1 3 back onto the chart. I ' m adding
these arrows back on as we proceed to point out the pullbacks that I
highlighted in that earlier chart, as they occur, for reference. See figure 8 . 1 9.
Figu re 8. 1 9
::.-:: C D -D !lSi £J
8 . 000
7 . 000
6 . 000
5 . 000
4 . 000
3 . 000
?J5o<------ 5 1 .661 Ret 0.786
---"7��---- 50.056 Ret 0 .78t;
23 30 Jul 14 21 28 Aug 11 18
C, once again, did not even threaten the . 786 retracement trailing stop line
with that second pullback. C has gone on to set yet another significant high
for the move. So far, this trailing stop technique has the trader still in the
trade, and having not even been close to threatened with being stopped out.
209
Another pullback has started, so I ' l l go ahead and add in another .786
retracement trail ing stop. I will keep the l ast retracement on the chart, again,
for reference. I ' ll also delete off the l ines used to calculate the last
retracement, for clarity. See figure 8 .20.
Figu re 8.20
�) 23 30 Jul 14 21 28 Aug 11 13
C started to pullback pretty aggressively with an expansion bar down, but

j ust l ike with pullback number one, it has thrown another one of those bars
with a lower tail. Although it seems l ike the moving average will soon be
above the retracement line by the time the price action could reach the area,
the retracement and moving average are getting much more in l ine with each
other at this point. And notice that this bar has thrust right into the area
between the two 'hybrid' lines.
None of this additional information is directly pertinent to this .786

retracement trailing stop technique; it' s j ust that it is of interest to see how
the various techniques compare as a trade unfolds. It' s this type of study and
examination that, in my opinion, helps me figure out how an issue trades,
and what techniques and variations will work best for me.
2 10
Let's move ahead in time and see i f C keeps going down here until it hits the
trailing stop out, or if that bar with the lower tail did, indeed, indicate the
same type reversal as in pullback number one. I ' l l add on some more data,
and add arrow number three back onto the chart. See figure 8 .2 1 .
Figure 8.21
9. 000
8 . 000
7.000
6 . 000
5 . 000
4.000
3 . 000
2 . 000
1 . 000
---r"--7""';:--- 50.056 Ret 0.786 0 . 000
9.000
8.000
7.000
6.000
23 30 Jul 14 21 28 Aug 11 18 25
C reversed, once again, above the .786 retracement, without even

threatening the retracement level. Notice, too, that the reversal came right in
the area between the two 'hybrid' lines. A nominal new high has been set for
the move, but not enough of a new high that I would key up a new
retracement. First, I ' d watch and see what happens from here.
211
I ' ll add on several more price bars of data, and we' l l reassess what is
happening. I ' ll also add the fourth arrow back in, showing the last pullback
that I previously highlighted in figure 8 . 1 3 . See figure 8.22.
Figu re 8.22
9, 000
8 , 000
7 , 000
6 , 000
5 , 000
54.332 Ret 0 .78�
4 , 000
3 , 000
2 , 000
5 Ub 1 Ret 0,73&
1 . 000
50 ,051S Ret O .78b 0,000
9,000
8 , 000
7 , 000
6 , 000
5 , 000
23 30 Jul 14 21 23 Aug 11 13 25 Se�
C is now going sideways in a fairly tight range. My thinking here is that my

stop looks very far away. I ' m looking at the moving average and the
'hybrid' lines, and they are way up from the retracement. I just know
instinctively, too, that a stop on the order of five dollars away on this stock
at this point in time, after this much of a trend move, is just too much.
Add to this the sideways motion, and I ' m thinking this trend may be over.
Notice the clustering in the area between the two lines. This consolidation
may be preparation for another thrust move up, and I want to be involved
with that, but I don't need a stop as wide as the current one to stay with the
move. For these reasons, I now feel that I want to do a new . 786 retracement,
using that last pull back.
2 12
I ' l l add a new .786 retracement onto the chart. I ' l l also delete off the old
lines that we used to create the last retracement, which we don't need
anymore. See figure 8.23 .
Figure 8.23
9. 000
j h lJ
8 . 000
7 . 000
5E. . 086 Ret 0 .786 6 . 000
t h ll ) t tJ
5 . 000
/I I jI J
54.382 Ret 0.786
4 . 000
3 . 000
J
2 . 000
5 1 .66 1 Ret 0.786
1 .000
50.0510, Ret 0.786 0 . 000
23 30 Jul 14 21 28 Aug 11 18 25 Se�
That stop looks much better, and 10 and behold it' s converging almost
exactly with the moving average. I would be very comfortable with the stop
set at this . 786 retracement.
2 13
Those readers with good memories may remember what happens next. 1 ' 1 1
add one more price bar to the chart, and we' l l discuss the results. See figure
8 .24.
Figure 8.24
?: C 0-0 !lEI £!
9.000
8 . 000
7 . 000
Sf; .03b Ret 0 .786 6 . 000
5 . 000
54.332 Ret 0 .736
4 . 000
3 . 000
2 . 000
1 . 000
0 . 000
9 . 000
8 . 000
7 . 000
6 . 000
5 . 000
23 30 Jul 14 21 28 Aug 11 18 25 Sep
C gapped down huge and really plummeted. Regardless of the stop that I had
chosen, this would have been a bail out situation for me. But that shouldn't
detract from the instructional value of this example. For instance, notice the
near exact convergence of the retracement and the moving average, right
where the price bar crosses them. In my opinion, if this uptrend were to
continue with nothing more than ' small' pullbacks as it progressed, it would
have had to tum before that . 786 retracement and 25-period moving average.
This is clear just by eyeing the chart.
Although the 'hybrid' regression channel technique kept the tightest stop,
and likely would have yielded the best price if the price action were more
'normal ', it was also ripe to take a trader out with a headfake. I think the
.786 retracement trailing stop did just about as good a job as any of the
techniques could have in trying to capture the stated trend here in C .
214
Sometimes it will be the best choice, and sometimes other techniques will
work better. The obj ect is to decide what areas of your trading the . 786
retracement technique may be best suited for.
Let's return to the example in BBBY. I ' ll make this a much quicker example
by not doing the step-by-step construction and analysis of the retracement
stops. First, let's go back to the chart, showing the trend that we are
studying, to refresh our memories. See figure 8.25.
Fig u re 8.25
?. B B BY D-D !lS E!
4 , 000
r
I j)ljlljjj�l
2 , 000
III II}lJ l . H
I\ 0,000
jIljll l \jr t
-rtT
{JFt
's m a l l '
I
38 , 000
's m a l l ' "
n ot 's m a l l '
's m a l l ' 36 ,000
t J
.f I 'sm a l l '
f
1
34 ,000
llh�J
"
n ot 's m a l l '
32, 000
21 2 13 Mar 14 21 2 13 Apr 11 17 25 May 9 15 23 30 Jun

This daily chart of BBBY was one of the example charts showing ' small'
versus ' not small' pullbacks. The chart has a 25-period simple moving
average on it, for guiding one's eye when looking at the pullbacks. The
moving average could also be used as a trailing stop in this trend. As can be
seen from the chart, this average would keep a trader in through the ' small'
pullbacks, and kick the trader out when the pullbacks exceeded ' small'.
I f a trader got in the trend sometime after the March low, perhaps getting in
around the area of the first pullback marked 'not smal l ' , the moving average
2 15
would have triggered an exit on the second pullback marked ' not smal l ' .
How would the . 7 8 6 retracement technique have handled the j ob, compared
to the moving average?
I ' ll j ump ahead to the exit trigger point, showing all the .786 retracement
trailing stops of significance, up to the retracement that was hit to give the
signal. We' ll then discuss what this shows us. See figure 8 .26.
Figure 8.26
?: BBBY D-D I!IS £I
1 . 000
0 . 000
39 . 000
38.000
36.97 1 Ret 0.78& 37 .000
36 . 000
's m a l l ' 35. 000
34 . 000
33 . 000
32 .000
3 1 .000
21 28 Mar 14 21 23 Apr 11 17 25 May 9 1

BBBY came a l ittle bit close to the second retracement as we progressed up

the trend, but otherwise the retracement trailing stop wasn't threatened at all .
It looks l ike i t did a great j ob at keeping the trader in thi s trade. The exit has
now been triggered, with the first trade below $39.87. It is clear to see that
the retracement techni que, in thi s case, was a bit 'tighter' than the 25-period
moving average technique.
The first thought that comes to me is this: wil l this be a headfake stop out,
with the 25-period moving average trailing stop containing the shake, and
keeping the trader in? There i s no way to know this ahead of time. You
make your best j udgment and accept the results. If you think the data implies
216
a different technique works better for this issue, you change your plan and
use that technique. I strongly advise the reader, though, not to change things
based on one case.
Let's move on, and see what happens next. I ' l l add one more price bar onto
the chart, and we' l l assess. See figure 8 .27.
Figu re 8.27
HI �
!lEI r:I
1
::'-:. B B BY 0-0
1
f) r 1
I tl J l t� { 1 � t�
1 . 000
0 . 000
" on Ro< ' '"'
38.936 Ret 0 .786 39. 000

,
38.329 Ret 0.7136
r J 38. 000
_=--='-h-
= _-,'s=m
=a= ' -- 36 .97 1 Ret 0.736
II_ 37. 000
} Il It )
's m a l l '
36. 000
'sm a l l ' 35. 000
34. 000
1
" 33. 000
Iftll)
n ot 's m a l l '
32. 000
3 1 . 000
28 Mar 14 21 28 Apr Jl 17 25 May '3 16

BBBY has really started to drop off here. It is obvious at this point that this
is not a ' small' pullback, and that an exit is warranted, based on the stated
obj ective. If the trader waited for the close of the bar below the moving
average, a far lower price would have been obtained. Given the rapidity of
the drop, this would have been a candidate for a close of the trade before the
price bar close.
All of this would have been avoided, though, with the retracement
technique. That technique signaled an exit much higher up, and without
waiting for any price bar to close. In this case, the move that triggered the
2 17
retracement stop wasn't a headfake move, and the retracement did an
incredible j ob at signaling the end of the ' small pullbacks only' trend.
1 'd like to add one more thing onto this chart before we wrap up this
example. I noticed that the action in the part of the trend that we have j ust
focused on i s very uniform and especially well suited to a regression channel
trailing stop. Let me add a channel onto the chart, and we' l l discuss what we
observe. See figure 8.28.
Figure 8.28
:::1. B B BY 0-0 !!I[;J l'!'I
1.
� �
1 . 000
t , ::::� :: : �:
--- 3'3 ,873 Ret 0 ,781; 0 , 000
1
/
39,000
i l
. l )f t f )l ) l j i r
38 .000
's m a ll'
�"'":T"""�--=-'-'-==-- - 36,97 1 Ret 0.78& 37 , 000
I
's m a l l '
36 ,000
'sm a l l ' 35 ,000
34 ,000
" 33, 000

n ot 's m a l l '
32, 000
3 1 .000
28 M..r 14 21 28 Apr 11 17 25 May 9 16

Not only did the regression channel do a superb j ob at representing the price
action, it also corresponded almost exactly with the . 786 retracement trai ling
stop line. Just look at that. The price bar, the retracement and the lower
channel line are all in almost the exact same spot. The ' downside' to using
the channel is that if you were waiting for a price bar close below the
channel line, you got out way later, at the same time the moving average
trader got out.
2 18
Or, perhaps, you exited on the rapid price action. But the retracement trader
got out very clean on a simple price cross below the trigger l ine. So why not
exit with the channel stop on a simple price cross? In my opinion, the
channel is too subj ect to headfakes on j ust a price cross trigger. I find that I
get just too many false signals that way. On the other hand, I don't feel that I
get too many false signals with the . 786 retracement stop price cross.
Why might that be? I think it is because I constructed the . 786 retracement
stop with some ' cushion' . Recall that I said that most retracements hit, or
just exceed, the . 6 1 8 retracement. I chose the . 786 retracement to give the
trade a little bit of breathing room. I feel that the channel would need some
'breathing room' i f I were to consider the trigger as a simple price cross.
That's why I came up with my 'hybrid' variation. With that variation I ' m
much more inclined to consider at least a partial exit on a price cross.
Let's finish this chapter with the S chart, using the .786 retracement trailing
stop. I'll show the entire trend, with the significant retracements added onto
the chart. See figure 8.29.
Figu re 8.29
::':. S 0 -0 I!1l3 l'!1
----- 38.027 Ret 0 .781;
35 . 000
------- 33.E.70 Ret 0 .786
30 . 000
------- 28.5'31 Ret 0 .78&
25.000
20 .000
Apr May Jun Jul Aug Sep Oct

2 19
The .786 retracement technique would have kept the trader in this trade all
the way up to the sideways consolidation in September. At that point the
technique took the trader out by a few cents. Now, would I have closed all of
my position on such a slight penetration of the trigger line? That answer
should be clear by now. I would have been scaling out as the trend
progressed, and would l ikely have taken some of my position off at the
retracement trigger.
I would have also had one or two other trailing stop techniques on the chart
at the same time, and I 'd be watching how they all came together. I use the
techniques, for the most part, as guidelines. I follow them very closely, but I
use some judgment, too, in my decision making process. No, I don't mean
that I go through all this work to then sit back and be totally subj ective when
an exit has been triggered.
What I mean is, I usually have two, or more l ikely three, techniques on my
chart at the same time. I rarely pick j ust one, and use it exclusively. So, what
I have is context. I ' m always after context. I can't say what I ' d l ikely do on
the S chart, because I don't have another two techniques on the chart. I don't
know exactly where I got in the trade, and how much I 've scaled out, and at
what prices. I need to know all this to tell you what I likely would have done
at that . 786 retracement.
I can say that some of my position would have come off. But if my other two
techniques were sitting just a bit below, I ' d have some of the position still
on, watching those areas. I purposefully didn't go into more detail on this
chart so that the reader would be forced to see what I am pointing out here.
My trading i s not cut and dried. It has some subjective element to it, based
on my experience. But what I want to make eminently clear here is that I do
all this within the confines of my pre-determined 'Trading Plan '.
In the next chapter I will delve into what I do when the price action becomes
'abnormal ' . Everything I have presented so far is based on a concept of
' normal ' price action. Sometimes the price action deviates from the norm,
and sometimes it does so in an extreme fashion. When it does, it creates an
'all bets are off situation. I ' ll present some of the things that I do when I
encounter these types of situations.
220
Chapter 9
Blow-Off Moves & Windfalls
I wanted to do a short chapter on blow-off moves and windfalls, because I

feel that they are cause to alter or abandon a trailing stop technique in mid
stream. Very rarely does the occasion come up that I completely drop a
technique while in a trade, but it does happen. I think it is important to show
a few examples of this type of event in action, and explain what I tend to do.
This way, you won't be quite as surprised if it happens to you.
Let' s go back to one of the most extreme blow-off moves I have ever seen,
the NQ back on January 3 , 200 1 , when the Fed did a surprise rate cut during
market hours. I ' ll show the chart from figure 5 .29, to help us recall what
happened there. See figure 9. 1 .
Figure 9.1
::':. NQ01 H 1 -1 1I!13 £J
2550. 00
2500 .00
2450 . 00
2400 . 00
2350.00
2300 . 00
2250 . 00
22 1
This is an extraordinary and an extreme move. That's why I call this a
'blow-off move ' . I am not going to strictly define the term 'blow-off move' ,
but suffice it to say that i f an issue goes crazy and drops like rock, or starts
going up like a rocket in an instant, that's a blow-off move. It becomes a
windfall move if you happen to be in the trade, on the right side of the move.
In this example on the NQ, as I mentioned in Chapter 5 , I was almost on the

wrong side of this one. It was pure luck that I didn't 'take the pipe' on this
one. On the other hand, if I had been playing long for a small move on the 1 -
minute chart, and looked up to see this explosion, I would have been the
beneficiary of a windfall trade. I feel one must take advantage of such a
situation, as best as possible.
Now, let's assume that I was using a moving average or an x-bar stop on a
long trade, and this blow-off happened. Look back at the chart. My I -bar
stop is how far away? There was a point before the last bar completed that
the NQ traded at 2590. The low of the previous bar was at 2280. That would
make my I -bar stop 3 1 0 points below that last traded price at that instant.
Hmmm, sounds l ike a pretty wide stop. A 2-bar stop would have had the
trader 4 1 8 points from the stop out trigger. It goes without saying that this
type of trailing stop needs to be abandoned the instant a move like this starts.
222
Let me add a 2 1 -period simple moving average onto the chart, to see how
that would look for a situation l ike this. I ' ll delete off the channel lines and
trendline, for clarity. See figure 9.2.
Figure 9.2
?: NQ01 H 1 -1 ' . I!GU3
2550,00
2500 , 00
2450 ,00
2400 ,00
2350,00
2300 , 00
2250,00
2200 ,00
2 1 50 , 00
... J
That doesn't help at all . The moving average is lagging tremendously, and it
i s useless for a trailing stop. Thi s presents a dilemma of sorts. What do I do
in a situation such as this? Well, the first thing I do is to realize that ' all bets
are off , and I abandon all the conventional trail ing stops. Then I try to
capture as much of the windfall as I can.
This situation would have been brutal, to say the least, for many reasons.
The first would be actual execution. If you put in a limit order with this thing
moving all over the place l ike crazy, you may or may not get hit. It was
moving hundreds of points in the blink of an eye. If you went with a market
order, you may have got a great fill, or you may have been taken out on a
wild low swing.
223
You would l ikely have zero recourse if your fill happened to be on the low
end of the swinging. You would stil l have a huge windfall , but it might have
been half of what it could have been. I have no answers for thi s aspect of the
trade. Personally, I think that I would have fired a market order in and taken
my chances. I doubt that I will ever see one l ike thi s again in my lifetime.
The second issue here was that you couldn't drop down to a lower time frame
to make a judgment on the price action, since thi s i s the I -minute chart
already. You could look at a tick chart, but I had one up when this happened,
and it was wild. Maybe some traders could have made a good judgment, in
seconds, based on that tick chart, but that was beyond my skil l level.
When a blow-off happens that i s not so extreme, you can quite frequently
get down to a lower timeframe right away, and make a good j udgment as to
when the massive thrust is starting to slow. This i s not to say that it won't
start right back again, but you have the option to peel off some of your
position on the stall, and lock that down. Then you can allow some 'give
back' as you wait and assess, seeing if another wave comes in.
This is my normal way to handle a windfall trade. It becomes mostly ' feel '
and experience. I have found very l ittle point, i n m y trading, to start
throwing indicators or trendlines or anything of the sort onto my chart when
something l ike this NQ example i s going on.
224
Let's look at an example in VPHM. See figure 9.3.
Figu re 9.3
::.� VPH M f) of) !lEl £J
0 , 000
70 , 000
30,000
20 , 000
12 19 26 Dec 10 17 23 31 Jan 14
This was an after the market news item. There was a huge gap up the next
morning, almost doubling the price of the stock. Now, this is j ust my own
personal interpretation, but if I happened to be long this stock and it started
trading at around $80 in the after-market, or pre-market the next morning, I
surely would have sold some of the position right there. If the stock were
one that didn't trade in the aftermarket, I would have opted to sell a good
portion on the open.
If I'm offered a 1 00% move, I ' m going to grab it on some of my position.

I ' d then watch and see what happens, and trail some of the position to see if
the move is going to continue. I ' d drop down to a lower timeframe and see
how the price action was going.
225
Let's look at the open on a I 5-minute chart. See figure 9.4.
Fig u re 9.4
� VPHM 1 5-1 aB E!
75 .000
70. 000
13�
It' s hard to tell from the I 5-minute chart what the price action was like. One
thing is clear, and that is that VPHM peaked at $85 .00 and dropped to
$60.00 all inside of 1 5 minutes. If I were involved with this trade, I would
have been looking over the 5-minute and I -minute charts to make a better
assessment as to what, if anything, I might have been able to see in the price
action. Unfortunately, I was unable to create charts to show the I -minute and
5-minute price action, due to limitations in the amount of data that I could
bring into my program.
Basical ly, what happened was that the first minute of trading had a $ 1 2.50
range, from a high of $85 .00 down to $72 . 5 0 . Then for the next 8 minutes,
the price was capped at $8 1 .50, trading to near that on every bar. The bar
lows started to get lower, from about $72.75, down to about $66.00. The
price then drifted lower, until it hit the $66.00 that was the closing price of
the first I 5-minute bar that we see on the chart.
226
What can we take from all of this? There was plenty of time to scale out of
some of the position in the upper end of the range of that I 5-minute bar. As
the price started to drift lower, more of the position could be closed. Some of
the position could be retained, if the trader wanted to wait on another thrust
move up.
In my opinion, the risk of a further drop, and an attempt to fill or trade into
the gap, was greater than the likelihood of another thrust up, so I , personally,
would be thinking about l ightening up more and more as time went on. I
believe I would have closed out most of my position in the first 1 5 minutes,
if I had been one of the lucky ones who caught this windfall .
Let's look on the I 5-minute chart at what happened, after some time had
passed. See figure 9 . 5 .
Figu re 9.S
:::-:: VPH M 1 5-1 I!S £J
75.000
70 . 000
35 . 000
14f Jan 18t
VPHM wound up stabilizing in the area where it dropped to at the end of the
first 1 5 minutes of trading, and basically from there it went sideways to
227
slightly down for the rest of the day. VPHM went on to become a very
active and volatile daytrading stock in the period right after this.
I'd like to show one other very interesting thing with respect to this move.
I ' m going to add a . 6 1 8 retracement to the chart, calculated from the close of
the previous day and the trading high for the day so far. Something
interesting is happening. See figure 9.6.
Figu re 9.6
?. VPHM 1 5-1 !lEi F!'J

-B5 , 000
-BO, OOO
75 ,000
� ' l{
70 ,000
-65,000
�J �tl .j- l .[-l.
4--
J
-----'--
- -
tH-I-
- 58,421; Ret 0,b13
ft,o,ooo
rs5 , 000
rsO , OOO
-45,000
14f hnll3t
It' s a curious thing that the point at which they brought VPHM back down to
after the initial frenzy, was pretty much right at a .6 1 8 retracement of the
move from yesterday's close to today ' s spike high. I have found that even
with all the frenzied action that one sees in blow-off moves, many of these
moves are still extremely 'harmonic ' .
228
Let's look at one more example, this time in EK. I ' ll start with a daily chart,
showing what a potential trader may have been looking at. See figure 9.7.
Figure 9.7
30 .000
29 .000
1
28 .000
27 000
26 .000
25 .000
18 25 Aug 8 15 22 29 Sep 12 19
We'll assume that the trader has gotten short before this point, perhaps on a
violation of the trendline that I 've drawn on the chart, or for some reason
consistent with the trader' s plan.
229
Let's see what the trader would have woken up to the next morning. See
figure 9.8.
Fig u re 9.8
?. E K 0-0 !lEI £I
30 , 000
29 , 000
28 ,000
27, 000
26 , 000
25 , 000
24,000
23, 000
22 , 000
18 25 Aug 8 15 22 29 Sep 12 19
This move was on a restructuring news announcement. The first thing that I
would do would be to get a I -minute and a 5-minute chart up, to see what
happens right after the open.
230
Let's see how a 5-minute looked, right after EK opened. See figure 9.9.
Fig u re 9.9
27 .000
26. 500
26 .000
25 . 500
25 .000
t
24 . 500
2'
The open was fairly stable. It' s not uncommon, with listed stocks, for the
open to be so well chosen as to be the immediate extreme for the move. That
is why I would close part of my position on the open, in many cases. It is
also not uncommon, though, to see the move resume after a short while, as
players who did not catch the news before the open start to hear what is
happening with the stock.
23 1
L et's add in some more data on this 5-minute chart, and make an
assessment. See figure 9. 1 0.
Figu re 9 . 1 0
27 . 000
26 . 500
26. 000
25. 500
25 .000
I
j
I t)
24. 500
t
24 .000
23. 500
23.000
25t
Now six 5-minute price bars have traded, and not one has taken out the high
of the previous bar. Given that the ranges of these bars are not extreme, I
would be using the highs on these bars as a trailing stop on my remaining
position i.e. a I -bar trailing stop. That's not to say that I would necessari ly
close out the rest of my position if I get a violation of the high of one of the
bars. I would likely close out some more of the position, and let some ride.
232
Let's add another price bar onto the chart, and reassess. See figure 9. 1 1 .
Fig u re 9. 1 1
27.000
26. 500
26.000
25 . 500
25 .000
+1
24 . 500
111rl
24 . 000
23 . 500
23 . 000
25t
My I -bar trailing stop would have triggered here, and I ' d close some of the
position out. At this point, I ' m going to do a l ittle 'trick' that I've found
helpful to me in cases like this. I ' m going to add a .6 1 8 retracement to the
chart, keying off of the high from today's trading, to the low so far.
233
Let's see what that looks like on the chart. See figure 9. 1 2.
Figu re 9. 1 2
� E K 5-1 !IS 1'3
27 ,000
26, 500
26,000
25, 500
25 ,000
+1
24 , 500
11 �
24 ,000
23 , 500
j " .,, ,, , 0 ""

23 , 000
r-------�--
25t
If the area of this .6 1 8 retracement were taken out, 1 ' d take off more of the
position. Why not use the .786 retracement, l ike we do with the .786 trailing
stop? You could. I j ust find that in cases l ike this, the .6 1 8 has given me a
more reliable guide. There certainly would be nothing wrong with using a
.786 retracement, if you feel that fits your own particular plan better.
And what would be my next point to take off more of the position, or
perhaps even the rest of my position? If the high of the day is taken out and
EK starts to trade into the gap, 1 ' d close more there. I might hang on to a
little bit in that case, and watch for a rollover in the area of the .6 1 8
retracement, keyed from yesterday' s c losing price to today' s low so far. I
have seen many attempts to close big gaps fail in that area, and then resume
the trend, usually with a vengeance. If the trade played out this way and I did
hold anything out, I suspect it would be a very small part of the position at
that point.
234
Let's see how EK responded to that .6 1 8 retracement. See figure 9. 1 3
Figure 9 . 1 3
26 . 000
25 .000
24.000
-------,_-- 23.832 Ret 0 .1;18
23 . 000
22 .000
21 .000
25t 21;f
That was pretty much it for EK. It exceeded the .6 1 8 retracement by less
than one cent, turning at $23 .84. I ' d call that a near perfect reversal off of
the .6 1 8 . By seeing that the price action wasn't reversing hard back up into
the gap before closing the remaining position, a trader might have been able
to manage the trade for a much better gain, and stil l be in part of the trade at
the point shown on this last chart.
I hope I have given the reader some good ideas about these extreme moves
that sometimes occur, and possible ways to handle them. My main point was
to point out how the conventional trailing stops techniques will no longer
work when such a market shock event occurs. I also threw in quite a bit
about how I handle such situations, which was a bit ' off topic' .
I feel that it i s important to give the reader more than just an explanation of
why the current techniques shouldn't be used if a trader finds himself or
herself in such a position. That would have been a situation where the trader
235
may have been saying ' Great, you've told me to abandon the trailing stop
that I was using, and I understand that this is a book only about trailing
stops, but now what? I ' m left hanging. ' For this reason I ' ve tried to expound
on the topic, and I hope my effort has been of some help.
In the next, and last, chapter I will tie in the techniques that we have learned
so far with the concept of scaling out of positions. In my own trading, I use
the techniques presented in this book in a very direct way with respect to my
scaled exits. The two have become integrated in my trading, and nearly
inseparable. I have found that the synergy that they have formed has greatly
benefited my trading. I have chosen to include the topic of scaled exits in
this book in hopes that the reader can benefit from developing and using a
combination like this for his or her trading, as I have benefited in my own
trading.
236
Chapter 1 0
Scaled Exits
In some ways, I think the material that I will present in this chapter is
invaluable. I know it is for my trading. It may not be suited for every trading
plan, but if it is suited for yours, I think you will really like this. Understand,
though, this is a different part of trade management than trailing stops. There
are two reasons why I am including this chapter in this book on trailing
stops.
The first reason is I feel that this concept on scaled exits (and how I apply it)
is so good that I want the reader to be able to have the material. To be able to
experiment with it, and mold it to his or her needs. For the most part, I
figured this out on my own. It may have been available in some resources,
but when I was new to trading, I sure couldn't find it. I felt that I had to
'reinvent the wheel ' , or, in some cases 'invent the wheel' . One of my main
goals as a producer of educational products for traders is to provide the type
of materialthat I was unable to find when I started as a trader.
The second reason I wanted to include the material in this chapter in this
book is that when I scale out, I very frequently use the very same trai ling
stops that we have covered, but additionally on a lower timeframe. I tend to
scale out on a lower timeframe, just as I use a lower timeframe to enter
trades. But I also run a trail on the traded timeframe. This is an interesting
twist to the way that I have presented things so far.
Let me sum this procedure up once again, and then we'll get on to some
examples. Let' s say I ' m trading the ES mini intraday on the 3-minute
timeframe. As I explained before, I would look for setups and context on the
I 3-minute chart, and use the I -minute chart for entry triggers. Since the 1 -
minute chart is frequently choppy, I sometimes have to be a bit careful with
the I -minute timeframe. Let ' s assume, for the sake of this example, there is
enough liquidity on the I -minute at this particular time, and it' s trading
smooth enough for my purposes.
I would set up a trailing stop on the 3 -minute chart, and let that ride. I would
also close out partial positions as the I -minute chart had thrust moves, and I
would use some of the techniques that we have covered so far to do so. This
237
means that I would have, in some cases, two trailing stops working at a
given time, on two different timeframes. And that i s exactly what I ' m trying
to point out that I do. Note that there is nothing unique to the timeframes that
I am using for this example right now. I have appl ied this to trades using the
weekly/daily/60-minute trio of time frames, and many other combinations.
It' s important to understand, though, before I continue on here, that this

chapter i s not going to be a complete treatise on thi s topic. In fact, it will be
more l ike a small primer. The topic of scaling out of positions, and the
variations that I am working with, could be an entire book unto itself, and I
expect that I will write a book on thi s topic at some point. For now, I want
the reader to at least see, in action, some of the aspects of using trailing stops
in concert with scaled exits.
I think this wil l be a lot easier to visualize with examples, so let's move right
on to that. I ' ll show a longer-term example i n INTC first, since I ' m sure that
many of my readers are not exclusively daytraders. Let's look at a weekly
chart, showing a big move up after what many called 'the bottom' , or end, to
the three-year bear market. See figure 1 0. 1 .
Figure 1 0. 1
ltl��l �
::''1. INT C W-W 1!8 l'!1
36 . 000
34 .000
32 .000
30.000
28 . 000
1 ��t� fl lV
26.000
24 .000
22 . 000
�\1t�ll ��hI J f
20.000
HV - 1t _
1 8 . 000
_J ----",-
_ J-1- __ 14.'306 Ret 0.786 1 6 . 000
1 4 . 000
02 03
238
INTC came back down and did a near perfect . 786 retracement test of the
bear market low. There were some other numbers and factors that created a
potential trade area around there. Let's assume a longer-term position trader
took a position in the general area of that . 786 retracement, and that the
trader plans to hang on for what may be a big move.
I ' ll switch to a daily timeframe, and show INTC after the move has started to
gain some steam. See figure 1 0.2.
Figure 1 0.2
?: I N Ie D-D I!S EI
22 ,000
2 1 , 000
�w
20,000
1 9 , 000
1 8 , 000
1 7 , 000
1 6 , 000
14,901; Ret 0,7eG 1 5 , 000
1 4 , 000
1 3 , 000
0ct Nov Dec 03 Feb Mar Apr May
At this point, the trader is looking to start trailing a stop, and to scale out of
some of the position at what are perceived to be technically opportune times.
239
I 'l l zoom in on the more immediate area of the price action, and add a very
short 5-period moving average onto the chart. I ' l l also add an arrow onto the
chart to point to the potential trade area, for reference. See figure 1 0.3.
Figure 1 0.3
?. I N T C D-D I!!IS F!I

2 1 ,000
20,000
1 9 , 000
1 8 , 000
1 7 , 000
1 6 , 000
�====:::;::===:::;:::=::;:===- 14,306 Ret O,7SG 1 5 , 000

Feb Mar Apr May
INTC is trading with a somewhat oscillating, uptrending movement, and

most of the swings are overlapping. So how might I manage this one? I
would consider a .786 retracement trailing stop, to keep me in the trade for
the long haul. This would give me a lot of leeway on each thrust, as far as
the pullback is concerned. This would give me a good chance to ride out the
noise, but also keep me in if INTC chops sideways for an extended period.
Let me mention here, one of the main advantages to the . 786 trailing stop is
its use in issues that tend to correct more by going sideways instead of
pulling back. This sideways motion will eventually break trendlines,
regression channels and moving averages, but not violate a .786 trailing
stop. Which technique you choose, again, depends on the move that you are
trying to catch, and the anticipated price action of the issue.
240
In my trading, where I usually target thrusts and where I want to be out if the
thrust stops and the issue goes sideways, I like moving average and
regression channel trailing stops. But some traders are looking for different
moves, like this example INTC trader, and the techniques that trigger exits
on a sideways consolidation don't suit them. This is where the .786 (or the
price movement adj usted .3 82) retracement trailing stop can really shine.
I ' l l set up the first . 786 retracement trailing stop. Keep in mind that as a
trade unfolds, you would be moving up the retracement keying point, as new
highs for the move are set. As this example unfolds, I will just show the . 786
trailing stop retracements that occurred where a noticeable pullback actually
ensued. See figure 1 0.4.
Figu re 1 0.4
?: I N T C D-D 1!13 £1
23 .000
22. 000
21 .000
20 .000
- 19.454 R.;,t 0.786
19.000
1 8 . 000
1 7 . 000
1 6 . 000
: ===;:========.:========.:======::::==
t======:;:::= :;: ==- 14.906 Ret 0 .781; 1 5 . 000
Feb Mar Apr May Jun
At this point, with this latest thrust, I would be ready to start taking some
profits. Remember, though, that the example trader's objective here is to
stay in this trade for a long, potentially new bull market move. I can't
specify the percentage of my total position that I would take off, but it would
be small.
24 1
The reasons why I can't specify how much I would take off are twofold. The
first reason is that this aspect of the trade is outside the scope of this book,
falling under trade management. The second reason is that although I do
know how much I would take off here, that number is extremely specific to
my 'Trading Plan ' and my situation. It varies from trade to trade and
situation to situation. Although I like to explain in my books what it is that I
am trying to do when I trade so that the reader can get a feel for my thinking
process, I can't do that here.
The reason is that when I comment on things that I do, I try to do so with
plenty of supporting details. The concepts of trade management that I would
have to cover here to explain why I am choosing the specific percentages on
this part of the scale out are j ust way 'off topic ' for this book. Readers who
want more detail on how I handle this aspect of the trade are referred to
Kane Trading on: Trade Management. Let's continue on with the process.
I'm looking for an exit trigger, just l ike if this part of the trade was its own
separate trade. If I 'm trading a single thrust, I l ike to use a 5-period simple
moving average as my trailing stop exit trigger, if I feel it represents the
price action. The first close below the average and that's my signal. In this
trading example, I can use that very same trigger, but this time to trigger a
single part of my scale out. F igure l O A shows the first bar to close below the
average, and hence the first part of the scale out process would start right
there.
242
I ' ll add some more data onto the chart, as INTC completes another thrust
move, and starts to drop below the average. See figure 1 0. 5 .
Figure 1 0.5
:;:.: I N I C D-D 1!18J £i
25 .000
24 . 000
23.000
22 . 000
2 1 .000
20 . 000
----- 19.454 Ret 0.7SI;
1 9 . 000
1 8 . 000
1 7 . 000
1 6 .000
�==::;::::�===;::=====:::;;:=::;:::==::;:=::;:==- 14.'306 Ret 0 .786 1 5 . 000

Feb Mar Apr May Jun Jul
It is clear to see that INTC didn't even threaten the .786 trailing stop. We
now have a close below the 5-period moving average, triggering another
scale out exit. I will add the new . 786 retracement trailing stop to the chart at
this point. I will leave the ' old' retracement on the chart for reference
purposes, but in actual trading I delete off the old one as soon as a new one
is added.
Again, let me point out that the . 786 retracement trailing stop can be updated
every time a new high bar for the move is laid down. Or, to make life easier,
one can do what I actually do in ' real life' . I wait until a retracement of
significance gets under way, a pullback that looks like it could be a threat to
the .786 area, and then I put the retracement on my chart. This saves me a lot
of unnecessary retracement work.
243
And what if the issue accelerates right towards that .786 area while I ' m
waiting to put the retracement on? I can either put it on the chart right then,
which literally takes me only seconds, or I can estimate the area of the . 786
retracement. With all the experience that I have with Fibonaccis, and all the
' screen time' I have under my belt, I can estimate the retracement within a
very small amount.
If I didn't even have the time to add the retracement on real fast, l ike if I
were trading on a I -minute chart and I saw the issue accelerating towards the
area that quickly, I ' d likely start to get out. In practicality, I can't remember
a single time when I had to struggle to add the retracement in real fast. For
those new to this, I think it' s good practice to move the retracement up with
each new price bar high (or move it down, for shorts).
244
I ' ll add on some more data, as INTC makes yet another thrust up, and then a
close below the moving average. I ' m also going to add in another, updated
.786 retracement trailing stop line. See if you can determine what points I
have used for this updated trailing stop line, and why I chose them. See
figure 1 0.6.
Figure 1 0.6
::':.. I N T C D - D I!JGI £I
29. 000
28 .000
27 .000
26 .000
25.000
-- 24.552 Ret 0.736
24.000
23. 000
22 . 000
------ 2 1 . 1e.g Ret 0 .78&
2 1 . 000
20.000
------- 19.454 Ret 0 .785
1 9 . 000
23 30 Jun 13 20 27 Jul 11 18 25 Aug 8 15 22 29

This is very interesting. INTC set a new high for the move on a large gap up,
and then pulled back. This is where I updated my .786 trailing stop
retracement. But INTC didn't even close below the moving average, to
trigger another scaled exit. Instead, it just started back up. This is not so
unusual, since the gap up was a strong move. On the other hand, this could
be a final gasp. Many strong trends end with a final gap up. Now INTC has
rallied near the high, but is rolling over, and has closed below the moving
average. This is a trigger to scale out of some more of the position.
The first thing I notice here is that the . 786 retracement trailing stop is quite
far away from the price action. I would not think that INTC would retrace
back almost $4.50 at this point, and still maintain the uptrend. I am going to
245
add in another, updated . 786 trailing stop retracement, this time using the
last pullback and the new peak, even if that peak is not quite as high, or is
only a nominal new high. I ' m choosing to do this because my current stop is
getting just too far away. This is very similar to what we did back in Chapter
8, with the example in C .
I will use some j udgment here, though, because this new stop will b e pretty
close. I may consider giving it just a little bit more breathing room. What do
I mean by that? I may take some of the position off if this new, updated stop
is violated, but I can't see myself closing the entire remaining part of the
trade if this new .786 retracement is violated by, say, two cents. INTC has
the look here of a range setting up. I don't want to get bounced out if INTC
is going to consolidate, and then break to the upside.
Let's look at the chart with the newer stop and a few more bars of data, and
reassess the situation. See figure 1 0.7.
Figu re 1 0.7
?. I N T C D-D 1!!!8 D
29 . 000
28. 000
27. 000
26. 000
25 . 000
24 . 000
23 . 000
22 . 000
------- 2 1 . l6'3 Ret 0.786
2 1 . 000
20. 000
19 .454 Ret 0.786
1 9 . 000
1b 23 30 Jun 13 20 27 Jul 11 113 25 Aug 8 15 22 2'3 Sep

246
INTC set a nominal new high by sixteen cents, and then has rolled over and
is dropping pretty fast. Before I panic, though, I recall that this is a trade off
of the weekly chart, and I 'm using this daily to manage the trade and choose
scale out points. In that context, this is a tiny move. Regardless, I might
scale out of another small portion here on the re-failure of that 5-period
movmg average.
I ' ll add in quite a bit more data, and we'll see how INTC is reacting to this
.786 retracement area. See figure 1 0. 8 .
Fig u re 1 0.8
::-::: IHTe 0-0 I!!I3i El
{1 M'
30 , 000
29 , 000
28 ,000
27,219 Ret 0 ,786
27 ,000
tJ
26 ,000
}i
25 ,000
24.552 Ret 0 ,78&
}
24, 000
III
23 ,000
V
22 ,000
2 1 . W3 Ret 0,78&
2 1 ,000
20, 000
20 27 Jul 11 18 25 Aug 8 15 22 29 Sep 12 19 2& Oct I
Now, I find that amazing! INTC drops down and reverses just shy of the
.786 retracement. It goes up and sets another nominal new high by eighteen
cents this time. It then rolls back down and further threatens that . 786
retracement, setting a nominal low for the range by seven cents, but never
breaking the retracement line. Then INTC reverses back up and does a solid
thrust up.
247
What would I have done in here? I likely would have scaled out of some
more of the position on the fai lure, again, of the 5-period moving average.
Other than that, I ' d now be riding what was left of my position into this new
high. 1 ' d be working my new . 786 trailing stop retracement off of this new
high for the move. And where did it go from here? I can't say, as this one i s
ongoing. The chart reflects the data current a s o f the time that I am writing
this.
This example should help make the process quite clear. Each and every one
of those thrusts could have been a trade unto itself for many traders. My own
personal trading plan would line up much better with trading each of those
thrusts as a separate trade. Hence, it is fairly easy for me to come up with a
scale out plan for a larger scope trade l ike this.
And, if each of those thrusts can be thought of as a separate trade where a

separate trailing stop technique can be used, how about dropping down to
yet a lower timeframe, and managing the exit while riding out ' small'
pullbacks? Yes, if you l ike to use that variation of the trailing stop, I can see
no reason why a plan like that can't be developed. That's one of the
fascinating things, to me, about all this material. There are near infinite
amounts of ways that you can combine and use this material.
248
Let me finish this chapter on scaled exits with an example in the ZB on a 1 5-
minute chart. I am trying my best to vary the timeframes, to make it clear
that these techniques are, for the most part, timeframe independent. Let's
start with a chart showing what a trader may have been looking at in the ZB.
See figure 1 0.9.
Figure 1 0.9
:::::. ZB OJU 1 5-1 !lEl £J
1 1 6 .000
1 1 5 . 500
1 1 5 .000
1 1 4 .500
1 1 4 .000
1 1 3 .500
1 1 3 .000
1 1 2 .500
1 1 2 .000
1 1 1 .500
1St lbw 17t 18f Jul21m

Let's assume the trader is short the ZB here. Perhaps the trader got short on
that trendline violation, or the l ittle pullback after the violation, or in some
manner consistent with the trader's game plan. The trader wants to scale out
of the trade in the areas where each thrust starts to tum back. Some of the
position will be held until a larger-scope trailing stop is hit.
249
Let's see how I would try to handle this. I ' l l start by zooming in on the chart,
and adding on 5-period and 2 I -period simple moving averages. I ' l l also add
a trendline in from those l ast two peaks, to see what that may tel l me as the
trade progresses. See figure 1 0. 1 0.
Figure 1 0. 1 0
1 1 2 .400
1 1 2. 200
1 1 2 . 000
1 1 1 . 800
1 1 1 . 600
Jt
1 1 1 .400
II
1 1 1 .200
1 1 1 .000
1 1 0 . 800
Jul21m
I ' m planning on using the 5-period average to indicate to me areas to scale

out, and the 2 I -period as my final exit trigger. I ' m also looking to possibly
add trendlines or a regression channel to the chart as things progress, to see
what that may show me. Just as a comparative note, I would also consider a
I -bar trailing stop as an alternative technique to the 5 -period average in this
case, as far as triggering me for scale outs.
250
I ' l l move the chart forward until I get my first 5-period moving average
violation. I ' m looking for a close above the average. See figure 1 0. 1 1 .
Figu re 1 0. 1 1
_ 1:1 x
1 1 2 . 400
1 1 2. 200
1 1 2.000
1 1 1 . 800
1 1 1 . 600
Jt
1 1 1 . 400
fl
1 1 1 .200
1 1 1 .000
1 1 0. 800
Jul21m
At this point I would scale out of the first part of my position. Notice the
convergence that i s starting to happen between the trendline and the 2 1 -
period moving average.
25 1
1 ' 11 add four more price bars of data onto the chart, and reassess. See figure
1 0. 1 2.
Figu re 1 0 . 1 2
1 1 2.400
1 1 2 .200
1 1 2 . 000
1 1 1 . 800
1 1 1 . 600
1 1 1 . 400
1 1 1 . 200
1 1 1 .000
1 1 0.800
Jul21m
The trendline and the 2 1 -period moving average have almost exactly
converged, and are running above the price action. This is a very common
occurrence. I'd be a l ittle concerned that the price action hasn't started back
down here, but I wouldn't take any more of the position off yet.
252
Let's move forward, and see how the ZB i s acting. See figure 1 0. 1 3 .
Figu re 1 0. 1 3
JJ-J:--t
: I
1 1 2. 500
��l J... ,
1 1 2 .000
1 1 1 . 500
1 1 1 . 000
1 1 0. 500
1 1 0.000
Jul21m 22t
The ZB has now done a very nice thrust down, and I'm looking for another
scale out trigger. Notice how, on the last scale out, a 'violation of the high of
the price bar' trigger would have gotten the trader a better exit price. I ' m
watching here, too, to see how this I -bar trailing stop technique compares
with the moving average trigger. I generally find that the bar trigger will
give me a better price most of the time, but is more prone to false signals.
253
I ' ll add one more price bar onto the chart, and we' l l assess. See figure 1 0. 1 4.
Figu re 1 0 . 1 4
1 1 2, 500
1 1 2 ,000
1 1 1 . 500
1 1 1 .000
1 1 0, 500
1 1 0,000
Jul21m 22t
I 've now gotten a signal to scale out of more of my position. The violation
of the bar high triggered on the same bar as the moving average, j ust like the
last thrust.
254
Let's move forward in time until the next exit signal. See figure 1 0 . 1 5 .
Figu re 1 0 . 1 5
_ 1:1 x
1 1 2 .500
1 1 2 . 000
1 1 1 . 500
1 1 1 .000
1 10 . 500
1 1 0.000
Jul21m 22t
The ZB has now triggered another scale out exit. The interesting thing to
note is that, this time, the ZB didn't thrust down much more than to a
nominal new low. This may mean that it' s just doing a sort of consolidation,
or it may mean the immediate downtrend is over. Regardless, I ' ll just follow
my plan. I am on the alert, though, and if I get in a situation that requires my
judgment, I'm going to lean towards closing out more of the trade than
holding it.
255
I ' ll move the chart ahead until we get to the next significant point. See figure
1 0. 1 6 .
Figure 1 0 . 1 6
_ c x
1 1 2 .500
1 12 . 000
11 1 . 500
1 1 1 .000
1 1 0. 500
1 1 0.000
1 09. 500
Jul21m 22t
The ZB has gone on to set another nominal new low, and triggered another
scale out exit. The bar high violation is also continuing to work as good as,
or better than, the moving average in timing the exits. It' s a tough read right
here if this i s a downward sloping ' consolidation' , or the end of the trend.
256
I' ll add three more price bars of data onto the chart, and we' l l reassess. See
figure 1 0. 1 7.
Fig u re 1 0. 1 7
,_ c x
1 1 2 .500
1 1 2 . 000
1 1 1 . 500
1 1 1 .000
1 1 0 . 500
1 1 0.000
109.500
Jul21m 22t
The ZB has formed a little wedge of sorts between the moving averages, and
I would guess that this is a critical point right here. I would expect that the
ZB is going to 'pop' out of this, and the direction of that pop will set the
direction for the next move. If the downtrend were to continue, I would think
it would have to start down right in here. Note, too, that my final exit trigger
is a close above the 2 I -period moving average. If the ZB breaks out to the
upside here, the entire trade is over.
257
I'll add one more price bar onto the chart, and we' ll see what happens. See
figure 1 0. 1 8 .
Figure 1 0. 1 8
Jul21m
chart created 1 996-2001
The ZB broke to the upside from that area, and has triggered a final exit by
closing over the 2 1 -period moving average. It has also penetrated and closed
above the trendline drawn from those first two peaks. This trade is now over.
258
Let's see if this was the end of this immediate downtrend. See figure 1 0. 1 9.
Figu re 1 0. 1 9
_ 0 x
1 1 2. 500
1 1 2 . 000
pI
1 1 1 . 500
tv
IJ
1 1 1 .000
1 1 0 . 500
/
1 1 0.000
109.500
Jul21m 22t 23w

The choices of scaled exits technique and overall exit trigger technique were
quite good, and did the requested job very well. The final exit trigger got the
trader out j ust as a new counter-trend was emerging. All in all, 1 ' d say
managing this trade as I have outlined here would have been a very good
job, indeed.
There were a few things that I was also looking at as this trade unfolded, but
I didn't want to put them on the chart as I explained the scaled exits. If I try
to do too many things at the same time, it will just appear as a jumbled,
confusing mess. Let me point out these things now, when they can be
presented on their own.
259
First, I drew an additional trendline on the chart, after a third peak was
formed. See figure 1 0.20.
Figure 1 0.20
_ c. x:
1 1 2 .500
1 1 2.000
1 1 1 .500
1 1 1 .000
1 1 0. 500
1 1 0.000
Jul21m
This new trendline is steeper, in a downward direction, than the first

trendline. You can see that the two trendlines are diverging, and if the price
action continues down for any significant length of time, the higher trendline
could get quite far away from the price action. On the other hand, the lower
trendline could be more prone to false signals. Given how far the latest price
action is from the lower trendline, though, it seems unlikely that this line is
going to be 'too sensitive ' .
260
Let's add back in a lot more of the data, and see how this new trendline
represents the price action. See figure 1 0.2 l .
Figu re 1 0.2 1
_ c x
1 1 2.500
1 1 2.000
1 1 1 . 500
1 1 1 .000
1 1 0. 500
1 1 0.000
109.500
Jul21m 22t
It appears as though this second trendline did a great job at representing the
price action. I would definitely want this l ine on my chart, if for no other
reason than I know that many traders will be watching it. The price slightly
penetrated the l ine on that last pullback, and then retreated again. Notice the
behavior of the 2 1 -period moving average with respect to that second
trendline, too. They are converging very strongly.
26 1
I now want to add one more thing to the chart. I ' m going to add a regression
channel . This could get cluttered and confusing, so I ' l l delete off the first
trendl ine off of the first two peaks, and the upper, ' entry trigger' trendline, to
open up the chart a bit. Let's see how this looks before I comment. See
figure 1 0.22 .
Figu re 1 0.22
: I
1 1 2 . 500
1 1 2.000
1 1 1 . 500
1 1 1 .000
1 1 0.500
1 1 0.000
1 09.500
Jul21m 22t
It may be a bit hard to distinguish the lines, but the trendline is the second
from the uppermost line. In other words, the trendline is j ust inside the
regression channel . Notice how the trendline and the channel are almost
perfectly parallel. Also, notice how the 2 1 -period moving average is pretty
much right on top of the regression channel ' s top line.
I don't feel that any of this is a ' coincidence' . It is very common to see this
kind of overlap. Just like with the entry techniques I presented in Kane
Trading on: Entry Techniques, the various techniques here, too, very often
point to nearly the exact same spots.
262
Let me finish by showing the chart with the exit trigger bar for the 2 1 -period
moving average technique, this time with the trendline and regression
channel on the chart. See figure 1 0.23 .
Figure 1 0.23
_ c' x:
1 1 2 . 500
1 1 2 . 000
1 1 1 .500
1 1 1 .000
1 1 0.500
1 1 0.000
1 09.500
Jul21m 22t
The second trendline, and the regression channel, would have given the
trader a better exit price trigger, but not by very much. When I trade, I have
several charts up in the same timeframe, so that I can view multiple
techniques at the same time, in an uncluttered manner. I l ike to know what
each one of my favorites is saying, as the trade unfolds.
Sometimes I just ' feel ' that one of the other techniques is doing a better job
with the price action than the one that I have chosen, and so I ' l l switch. Most
of the time the switch turns out to be a good decision. And since most of the
time the techniques point to very close areas as it is, I feel l ike it isn't likely
to hurt me much if the original technique turned out to be the best one after
all.
263
I think the most important thing for a trader to take from this chapter, and
the discussion included herein, is the possibly synergistic effect of
combining trailing stop techniques with scaled exits, especially if the scaled
exits are triggered with trailing stops themselves. I strongly encourage the
reader to explore and experiment with these ideas. See if they can be
incorporated, after any necessary modifications, in such a way that they
improve your own personal trading plan.
I have attempted to present many variations, and how I use them. I feel a
good deal of the power in these techniques is in how adjustable and
adaptable they are to the individual ' s unique ' Trading Plan ' . I firmly believe
that if you take the time to work on these techniques, and use them within
the context of your plan, you can't help but benefit from them.
264
Conclusion
This book has far exceeded my expectations, not only in terms of the final
quality of what I have put together, but also in the sheer amount of material
and examples that are included. It wasn't until after I finished the book that I
realized just how many techniques and variations that I have come up with,
and the level of detail that I have explored them with. In many ways, now, I
jokingly see this book more as an introductory work than as a definitive
work.
I found that there were many times during the writing of this book when I
wanted to show more examples and more details, and even introduce
additional variations, but I held back. The length of this book, as it is, turned
out to be a quite a bit longer than the original 'blueprint ' , and yet I feel that I
could have added so much more. This makes me wonder if I ' ll be writing
Kane Trading on: Advanced Trailing Stops Techniques down the road. I ' m
not sure if I mean this in j est or not, but another book seems very likely.
Don't get me wrong, though. What I am talking about are subtleties and
refinements, and additional variations. I laid out my best techniques and
variations in this book. Perhaps the subtle points that I would like to have
covered in more detail, and with more examples, are not that easily
conveyed. I ' m talking about things that start with 'In cases like this, here's
something I tend to see . . . ' I ' ve tried to do as much of that as I could in this
book, but I had to limit the discussion at some point.
F or my learning, this type of discussion is what I find the most useful, and
the most lacking, in a lot of the books and materials that I have studied in the
past. That is why I have tried to write my books with as much 'trader talk' as
I could real istically include. I hope thi s has benefited the reader as much as I
have envisioned that it would.
My goal with this book was to produce a work that would have met my
needs when I was a new trader, yet would have continued to be of use to me
as my skills developed. I wanted to write a book on the topic of 'when and
where to exit a position' . I felt the need for this kind of book, but could
never find it. I feel that I have succeeded with my goal.
265

Jim Kane 07 Trailing Stops

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Jim Kane 07 Trailing Stops

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I(ane Trading on:

Copyright © 2003 by James J. Kane

Published by Kane Trading

ALL RIGHTS RESERVED. No part of this publication may be reproduced,

This publication is designed to provide accurate and authoritative

Printed in the United States of America

No claim is made by James J. Kane, or Kane Trading, that the trading

Chapter 1 Trailing Stops Overview 3

Chapter 2 Which Trend? 7

Chapter 3 Moving Average Cross 17

Chapter 4 Moving Average Crossovers 55

Chapter 5 Regression Channels & Trendlines 79

Chapter 6 x-Bar Stops 145

Chapter 7 Fixed Amounts 165

Chapter 8 Fibonacci Stops 185

Chapter 9 Blow-Off Moves & Windfalls 221

Chapter 10 Scaled Exits 237

In developing material related to Fibonacci trading, two sources have been

Trailing Stops Overview

The starting point is to have a bagful of variations on the techniques, and

It would be an easier presentation for me if everything was simply cut and

The technique of trailing a stop i s valuable, I feel, because it i s dynamic. It

Although this is an oversimplification and doesn't take timeframes into

Understand, I am not saying come up with a mathematically rigorous

Mar Apr May Jun Jul Aug Sep

Mar Apr May Jun Jul Aug Sep

Mar Apr May Jun Jul Aug Sep

Mar Apr May Jun Jul Aug Sep

May 9 16 23 30 Jun 13 20 27 Jul 11

Mar Apr May Jun Jui Aug Sep

Moving Average Cross

?... lEN 0-0 1513 £1

2f, Nov 1f, 23 30 Dec 14

Keep in mind, I would normally put these retracements on my chart as soon

When I discuss the use of these techniques, I am always discussing them in

--�r--f-- 44.327 R�t 1.518

-- -t--+ - - 44.327 Ret U1S

2& Nov <) 1& 23 30 Dec 14 21

�-;, LEN l)ol) I!I3I!1

----J---/--- 44.327 Ret 1 .� 18

26 Nov '3 16 23 30 Dec 14 21

::::: LEN 0-0 !IS £I

----t--+--- 44.327 R..t LE.la

---++---- 43.046 Ret 1.272

26 Nov '3 16 23 30 Dec 14 21 28

44.327 Ret 1.6 18

?: LEN 60-1 . !lEla

?:'. tEN 60-1 !lEi £i

27t 30f Dec3m <It 5w 6t 7f Dec10m llt 12w

At this point I would add in the 1 .272 and 1 .6 1 8 external retracements, to

_______ ..1- 43 .041; Ret 1 .212 3 . 000

This 32.5-period moving average on the 60-minute chart will approximate

I frequently found the 'waves' pretty uniform, or if not uniform, varying

?. lEN 60-1 !IS £I

�:. lEN 60-1 ," I!I3 £J

:::'1. LEN 60-1 !lEI £I

:::.-:: LEN 60-1 'f;'!' � 1!113 EJ

?:. LEN 60-1 l!!81 l!1

21 28 Oct 12 1'l 2& Nov 'l 1& 23 30 Dec 14 21 28 Jan 1 1 18 25 Feb 8

21 28 Oct 12 19 26 Nov 9 16 23 30 Dec 14 21 28 Jan 11 18 25 Feb 8

21 28 Oct 12 19 2& Nov '3 1 & 2 3 3 0 Dec 1 4 2 1 2 3 Jan 1 1 18 2 5 Feb S

Chart created by Dynamic Trader (c) 1 996-2001

21 28 0ct 12 19 2& Nov 9 16 23 30 Dec 14 21 28 Jan 11 18 25 Feb B 15

;:. LEN 0-0 !lEI £I