Yesterday UGL was triggered into a trade. We reviewed the position and the risk position. Today I wanted to take a slightly closer look at the trailing stop we employed to mitigate our losses should this trade go against us.
One of our ironclad rules is that we never place a trade without a protective stop – NEVER!
Due to the volatility in the markets, we are employing a trailing stop with all of our trades. Let’s take a look at the chart.
As you recall we use proxies for our underlying futures instruments. We have used only 5 in my book and we continue doing that as we keep going with that THEORETICAL exercise.
In the case of Gold, the ETF (exchange traded fund) we use is UGL.
You can see in the chart above that we were triggered in at the candle in the yellow box.
At the same time a trailing stop was placed at $56.93, just under support. This is the most likely place we are wrong. We have given the trade room to breathe, but if support is broken, we need to accept the warning that the trend maybe changing.
$65.37 (trade price) – $56.93 (trailing stop) = $8.44
The trailing stop is $8.44 below the purchase price. If the price moves up so will the stop. If the price goes down, the stop will stay where it is and stop us out if called for.
Today, if you look at the chart, the price had a high of $67.11. This means the stop price followed the market price up and was anchored at $58.67 ($67.11 – $8.44).
This means that we just reduced the risk on this trade. It started as $1,688 (200 shares X $8.44). Because the price went up a little and anchored the stop at $58.67, we reduced our position risk from $1,688 to $1340. You have everything you need to figure out how I came to that number.
We are the happiest of campers when our trade attains risk free status. It is the first goal of any trade.
That is it for today. If you have any questions or concerns, make sure you voice them by dropping me a line at: email@example.com