Every technique in this blog is complementary with the other techniques. They may all be profitable by themselves but are far more profitable when combined. For example, the main purpose of the channel breakout is to ensure that we catch the big move.
One of the purposes of the slingshot is to take profits on strength. It is there to boost the number of winners in relation to the number of losers. In addition, it shows the concept of confirmation and how it can be used in a trading method. It is similar to trend analysis in that we are always looking for similar swing highs and lows and looking for breakouts using those highs and lows. But it differs from trend analysis in that it is looking for confirmations and also takes profits.
Let’s start to look at the rules. In Figure 8.1, the first data point is to identify what I have labeled Key High. The key high is any high that is higher than the previous high. So in this case the key high is the first swing high since early December.
We then identify a Key Low. It is also a swing low. This key low must be at least a two-bar swing low. My preference is a three-bar low but I’ll take a two-bar low.
The Slingshot High is the critical high in the technique. Let’s examine it a little closer. Note that this slingshot high is a failure. This had been a strong bull market to this point but this bar failed to make new high. The slingshot high doesn’t have to be a failure, but it helps.
There are two confirmations for the slingshot high. The first is that the slingshot high must be at least three bars from a previous higher bar. In this case, the previous bar with a higher high is actually the key high. It won’t usually be the key high, but it was in this case. The second is that the previous high bar must not be more than 20 days from the slingshot high. Once again, the previous high bar is the key high bar and it is six days from the slingshot high.
These two confirmations sharply reduce the risk in the trade by ensuring that you are only getting into the trade with the odds in your favor. The first confirmation makes sure that you are not in a running market and that the market is creating a solid formation. In effect, it is ensuring that you are not buying the top of a formation but the beginning of a new trend. The second confirmation makes sure that you are not trying to pick the bottom in a market. Note that these two confirmations make sure that you are not trying to get in on the key high but only after certain price action has shown that the bull leg is over.
I haven’t put it on the chart but we are also going to use the ADX Filter on this method . We now look to sell on a break of the key low. This confirms that the trend is now down and we can get short. Your first protective stop loss is the slingshot high. In fact, I like to make this a reversal stop so that we not only exit our short position but go long. Remember, a failed signal is a signal!
Unlike trend analysis, which is designed to try to stay in the position for as long as possible, we are going to enter a profit-taking limit order.
The first profit objective is calculated this way. Take the difference between the slingshot high and the key low. Now subtract that value from the key low. You will take profits at that point on half of your position. Yes, you really should be using at least two contracts on this method because we are using several methods to profit from this method. Let’s carry on.
Raise the stop to a level that protects 25 percent of your profits when you hit the first profit objective. In this case, the slingshot high was at 1.4363 and the key low was at 1.3826 so the difference was 537 pips. I call this the profit target. We subtract 537 pips from the key low and we get a profit objective of 1.3289, which we hit where I have placed an arrow labeled Take Profits. At this point, we would move the protective stop down to 134 pips below the key low of 1.3826 or 1.3692.
We are now going to use a trailing stop based on the factors we have just outlined. Move the stop to the original profit objective of 1.3289 if the price moves down 1.5 times the profit target from the key low. Keep it trailing after that by 50 percent of a profit target. In this example, the profit target was 537 pips so use a trailing stop that is roughly 268 pips from the low of the move.
We will also use the Bishop as an exit technique for slingshot. That will often be the normal exit plan should we really get into a major bear or bull market. We will also be taking profits as the market moves lower. But it depends on how many contracts you have.
At the point where we have reached the profit target, we will have liquidated half of our position. Liquidate another half if we reach a level of two times the profit target. Liquidate another half if we reach a level of three times the profit target and so on until you are left with just one contract. The final contract will be exited only on a stop out or a Bishop signal.
Source: How To Use The Slingshot for Profits
