(Click on image above to enlarge it.)
Here's a weekly chart of the USDCAD that was shown previously to demonstrate the strengths of the other Ocean tools. Now let's focus on the two most recent NMC buy setups (labeled #1 and #2 in magenta) to analyze how the STX should be utilized after the trade entry. All of the new points of interest pertaining to the application of the STX will be shown in magenta to clearly delineate them from the material presented in the previous chart examples.
In the first location of interest (labeled #1), we see that there was an NMC Zero Hit setup on the week ending 7/11/08, with a delay bar on the week ending 7/18/08. An entry then occurred sometime during the week ending 7/25/08. The market quickly responded with a 3 week rally into the weeks ending 8/8 and 8/15.
Note that on the week ending 8/8 (magenta arrow on prices), most of the range of the price bar advanced beyond the upper standard deviation (SD) band of the Regular Ocean moving average (upper magenta line), and had penetrated the upper SD of the Fast Ocean moving average (upper green line). Also note that by the following week ending 8/15, the entire range was outside the upper magenta SD band, and a large portion of the range was beyond even the upper green SD band.
Additionally, the NMC had exceeded its upper SD overbought zone (white dashed line on NMC, shown with magenta arrow). These are indications that the market may have gotten somewhat overbought, and that a pause or possible reversal might be forthcoming, so we need to be vigilant in assessing potential ways to exit the trade with the most efficiency possible.
Now note the behavior of the STX (cyan dots on the price bars). In the early stages of an advance (or decline) the STX is designed to respond relatively slowly to the advance, since the movement is just getting underway and is often subject to retests. Of course, the process of exiting a trade correctly will often require more skill than the entry process.
Correctly exiting a trade should should first be examined on the entry time frame, and then when price action dictates a more attentive stance, come down to a lower time frame to more closely monitor the market.
An effective stop should remain quiet while the volatility of the market is low, and then respond quickly to the increased volatility as a market move becomes ballistic. Of course, if the stop is too tight it results in whipsaws and potential early exits before the market really makes its move. If it's too loose and unresponsive, too much open equity is given back at the end of the move. It's a delicate balancing act to successively employ an optimal profit taking exit stop, and this is where the STX really shines.
In this example, we see that the STX has remained relatively calm during the early phases of the advance as the large move is getting under way. Further, the events described above, relating to the fact that the market may have become a bit overbought on this time frame (around the 8/8 period), suggest that we use that information to employ a multiple time frame approach to the exit process.
Even if this trade had been initially conceived as a position trade, the new information concerning the short term overbought condition suggests that a lower time frame be employed to capture a larger portion of the available open equity. So as we have done with the analysis of other markets, let's move down now to the next lower time frame and analyze a USDCAD Daily STX chart:
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