Traders adjust their stops over time in the direction of the trend in order to lock in profits. As an alternative to Moving Average and Average True Range trailing stop systems. SafeZone is designed to eliminate the "noise" component of a trend and hopefully avoid having stops shaken out by that noise. It uses a 22-day Exponential Moving Average to define the trend, but itI prefer a longer (63-day) exponential moving average. Elder then calculates directional movement in a similar fashion to Directional Movement System and applies a multiple of between 2 and 3 to determine the trailing stop.
Safezone Trading Signals
Safezone stops are primarily used to time exits from a trending market. Use the exponential moving average to determine the trend and select the Safezone long or short option.
- Exit long positions when price crosses below the Safezone stop.
- Exit short positions when price crosses above the Safezone stop.
Safezone cannot be used to signal entries as with some stop-and-reverse systems.
The RJ CRB Commodities Index late 2008 down-trend is displayed with Safezone (short, 22-day, multiple of 3) and 63-day exponential moving average used as a trend filter. Entries are taken when price makes a new 5-day low while below the moving average (or 5-day high when above the MA).
1. Go short [S] when price is below Safezone and closes below the 63-day exponential moving average
2. Exit [X] when price crosses above the Safezone Line
3. Go short [S] when price makes a new 5-day low while below the 63-day MA
4. Exit [X] when price crosses above
5. Go short [S] when price makes a new 5-day low while below the 63-day MA
6. Exit [X] when price crosses above
7. Go short [S] when price makes a new 5-day low while below the 63-day MA
8. Exit [X] when price crosses above the Safezone Line