I posted on a head and shoulder sell example in Apache Corp a few weeks ago. I thought this might make an interesting follow up for readers looking for a practical example of some of the theory outlined in our Trading Sense video on closing strategies
The measuring objective shown on the chart below projects the height of the head and shoulder pattern from the place on the "neck line" where price first broke through. I used the Fibonacci price (extension) tool to do this. It's the 100% measure at $90.84 which the market found last night. The 200 day moving average is close to this level, adding potential significance to it
The sell entry on the chart assumes using a stop entry order about 1.2% below the neck line. On that basis entry would have been at about $96.75. At the measuring objective this means a profit (before costs) of $5.91 per CFD
Closing strategy example
- The first stop shown on the chart is behind initial resistance back in the body the head and shoulder. This allows some scope for a retest rally. This stop would be at about $99.80. With an entry of $96.77 this means a loss (or initial risk) per CFD of $3.05 before costs. So the basic pay off ratio for someone who takes profit at the measuring objective can be calculated by dividing the profit per CFD by the initial risk (5.91/3.05) and is 1.9 times.
- There was a retest of the neck line after the initial break. Once this is completed the stop might be moved down behind the re test peak. The 2nd stop would be about $98.80, reducing the loss before costs to $2.03 per CFD
- One approach would have been to use a limit buy order to take profit at the measuring objective
- However, some traders build strategies around simply moving the stop once the objective is hit and trying to run the trade further.
- One approach to this might be to use a manual trail, setting the stop just behind the high of the candle that reached the objective. On that basis the new stop would now be $93.90 (still achieving a profit of $2.85 if the stop is hit).
- Each time a candle makes a new low, the stop is moved down behind that candle's high. Once there is a candle with a high below the original measuring objective , the stop is left at the objective i.e (90.85).
- In the meantime a new objective is set. In this case around $88.80 which is the 61.80% retracement level. If this is hit, the next objective is selected and the whole process of moving the stop is repeated until the position is eventually stopped out.
- Some traders may prefer the automatic trailing stop feature on the platform , especially for strategies based on shorter term charts where it can be pretty work intensive to changing stop levels manually.