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FXS-TRAILING STOP
Doug Schaff
FX-Strategy
| Name: | FXS-Trailing Stop |
| Characteristic: | Trend Direction |
| Parameter Defaults: | None |
| Plots: | Trailing Stop |
FXS-Trailing Stop is an effective trailing stop loss once price is trending. However, in addition to this basic function it is also color coded to provide additional information:
| Blue: | Established uptrend |
| Light Blue: | Upward bias |
| Red: | Established Downtrend |
| Purple: | Downward bias |
Usage
The Trailing Stop reacts only to "significant" moves and avoids the problem of whipsaws seen in the Parabolic (stop and reverse) indicator. In the chart above it can be seen in the large downtrend to the left of the chart, that price rallied sufficiently to penetrate the Trailing Stop on a close basis. At this point, the color changed to purple signifying that the rally had not reversed the trend, but that the bias remained lower. Parabolic would have reversed on this penetration and caused a bullish signal while the FXS-Trailing Stop maintained a bearish bias.
Indeed, at the end of the large decline the Trailing Stop changed from "established downtrend" to "downward bias" and moved horizontally without changing from that status in spite of price oscillating up and down. This is a vital indication that price, while having stalled in the downtrend, had not performed a sufficient penetration above the Trailing Stop to suggest that the bearish bias had reversed. As can be seen, after over one month of sideways movement the bias did in fact change from lower to higher as the color changed from purple to light blue and this provided an early indication of a breakout from the sideways consolidation.
It is always imperative that indicators be used as part of a complete integrated analysis process. A very simple example would be the use of momentum indicators when the Trailing Stop implies a bias only and no established trend.
There is an implication that if there is no trend, then signals from momentum indicators become valid. Looking at the above chart it can be seen that during periods when the Trailing Stop is colored either light blue or purple that the crossover signals from FXS-Stochastics provide excellent trading opportunities. Equally so, after the first buy signal on the left of the chart, by the time the FXS-Stochastics turn lower, the Trailing Stop has turned blue and this avoids the early exit from what turned out to be a very profitable trade.
