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The Three Day Trailing Stop Rule

06/19/2018 08:30


Q&A (from 2016)

Q: I read your book, ‘The Diary of a Professional Commodity Trader,’ back in 2012 and have repeatedly reviewed several sections. It seems to me you no longer strictly apply the Last Day Rule as you did when you wrote the book. Is this my imagination?

A: Great observation — and I should have previously addressed this. Compared to “Diary,” I have made a couple of modifications to the Last Day Rule (LDR). First, when a breakout occurs with an extreme Wide Bodied Bar (WBB), I am not willing to risk a trade to the high (short) or low (long) of that bar. Instead, I will attempt to find an intraday reaction high or low within the WBB using an intraday graph. Second, I am much quicker today than five years ago to advance my protective stop in the direction of trade using the concept described in “Diary” as the “Retest Failure Rule.” My goal is to adjust protective stops to insure a break-even trade within a week after trade entry.


Subscriber Q&A 

Q: I know you usually enter buy stops to go long and same time enter protection stops. And usually protection stop loss is the low of breakout bar that completes the pattern.

But if for example on Sunday I am putting buy stops orders and want to put protection stop loss order but as there is no bar for Monday and so no low, how do you decide on stop loss level?

A: I still use the Last Day Rule concept -- that being the low of the day of the breakout as long as at least half of the bar is below the boundary line. Otherwise he will use the low of the last full day within the pattern.

But, I have modified this LDR since the book was written and looks to find a tighter stop. I often will use the open price of the day of the breakout. This requires taking a look at a market that breaks out when I know I have filled on my entry. For example, the LDR low on Oct 21 in Soybean Oil was 34.20, but the open was 34.44. In this case, I am currently using 34.39 and 34.14 as stop prices.


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