(This is Part 1 of a series.)
At first glance the STX may look like an ordinary moving average. It’s not. It may even have a superficial resemblance to Ocean’s own NMA or Fast NMA. It’s not those either. Instead, it is a very sophisticated methodology for placing the stop in any market. Will it be perfect? No, that’s not possible. Markets are too wily and unpredictable for any stop placement system to ever be perfect, or even close to it.
Rather, what the STX does represent is an attempt to pinpoint the highest probability stop placement for any market that is moving. Of course, if a market is not moving and is just consolidating, no stop will be ideal or even desirable. In that case the STX will be horizontal or close to it. However, there may be meaningful movement on a lower timeframe, and in that case the STX will again attempt to represent the best probability stop on that lower timeframe.
There are two ways in which a stop placement can be less than ideal. The first is that the stop is too far away. A stop can always be placed so far away that it’s almost never hit. The problem with that kind of stop is that, on average, it will give up far too much money if the market has a strong counter-reaction or actually changes its fundamental trend.
The second way in which a stop can be less than ideal is that it is too close. In that case, the market is often not being given enough breathing room for the trade to accomplish its fullest potential.
It is just in the nature of things that the STX will be hit sometimes. Indeed, it will always be hit sooner or later. That is only natural in the world of markets. What the STX represents is not the certainty, but rather the highest attempted probability, of a stop placement that is neither too far away nor too close. It represents the highest probability, as far as is possible, of the stop placement in a given market trend that will tend to maximize profitability in that trend.
The STX is not intended to provide the initial stop in a trade. For the inital stop one should use the highly desirable technique taught to users of the Ocean Standard Software. But once the market actually gets into its trend and has crossed decisively above the STX (in a bull move) or below it (in a bear move), one should then shift the stop placement to the STX.
If during the trend the STX stop is hit, and shortly thereafter the standard Ocean Tools give an indication that the move has resumed, and in addition the market has moved beyond the STX once more, then one should strongly consider reinitiating the trade.
(This is the end of Part 1. Go to Part 2.)
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