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Trailing Your Stop When Swing Trading a Rectangle Top - follow-up on XEL Swing Trade Scenario

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This is just a quick follow-up to last weeks piece on swing trading a rectangle top. If you read the last installment, we covered a swing trading setup for Xcel Energy (XEL). Historically, the percentage in which a rectangle breakout has reached its upward target in a bull market is on the high side, near 75%. Yet, there is a higher-than-average likelihood that the pattern will undergo a throwback. We set two price targets shown above--at 80% and 100% the height of the pattern.

Lets talk about trailing stops. When price initially broke out, a trader might have initially set a stop loss at the bottom of the rectangle [1], right at the support line as the breakout out may fail and test support once again (and if this breaks, then were looking at a different trade, but it also would depend on the price action leading toward that break).

A few sessions after the breakout, one that may give indication that a traders upward bias may be correct, s/he may want to move the stop to the higher swing low [2]. Why there? At this point, we can assume that the technical bias is correct, and that XEL is, once again, continuing its uptrend. But should any factors in the fundamental environment disrupt the technical expectation, then a break below [2] would invalidate the thesis (and minimize a traders loss).

Finally, the selloff on August 23 (the day President Trump announced that he would order US manufacturing companies out of China) marked another swing high and swing low point. The latter [3] might make a good case for moving ones trailing stop upward.

Currently, XELs price is just short of its target. Should the trade fail, ones stop at [3] would be a few points under breakeven level. Depending on ones target--whether the 80% or 100% market (and tomorrows price action)--a trader might want to place a stop below todays low should price continue inching up above todays session. Again, the trade is in a profitable position, but one has to consider that 66% of the time price pulls back while 75% of the time price has historically reached its target (in a bullish rectangle top).

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About the author

Karl Montevirgen is an independent content writer. Having been involved in the commodities and FX markets for the last 9 years, Karl writes for several companies and publications in the finance space. 

You can view his extended profile, list of publications, and theoretical content work on his LinkedIn page. 

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