Bulkowski's Elevator Stop

This is an example of the elevator stop that works as expected.

Price begins an uptrend at A, but you'd never know it until several price bars later. At B, the stock had been moving up in a strong push higher. The stock has at least three higher lows and it's best if it has three higher highs, too, but that's not a prerequisite. When B appears on the chart, place a stop loss order a penny below the bar's low.

Bar C appears. After the close of this price bar, raise the stop to a penny below the low at C. Do the same at D.

When price reverses, it trips the stop at E and closes out the trade. Notice that the stop triggers a bar away from peak D.

This is a template of how the elevator stop works. Here's what to look for.

1. Look for a strong uptrend of at least 3 price bars (shown in black, following the diagonal red line). The best case is each bar should have little or no overlap with the prior price bar. The rise is almost vertical.
2. After the close of the third price bar, place a stop-loss order below that bar. In this case, at the close of bar A, place a stop-loss order at B, slightly below the low of A. NEVER place the stop at the same low price as A. Set it a penny or two below (or whatever you're comfortable with. I use a penny).
3. As each higher low appears, raise the stop. At the close of bar C, raise the stop from B to D.
4. Never lower the stop. At the close of bar E, raise the stop to F.
5. Continue to raise the stop until the stock triggers the stop.

Gamestop is a stock in the news recently. Although these charts make the price bars look short, they are quite tall. Look at the price scale and you can understand what I mean.

Price forms a strong uptrend which is noticeable at bar A. Bar A is the third price bar along an uptrend where price has more than tripled in three days.

At A, place a stop a penny below the bar's low (B). At the close the next day, raise the stop to C, a penny below the bar.

Continue raising the stop as price makes a higher low. In this case, the stop triggers near the open of the tallest price bar on the chart, cashing you out at about 250 (D).

In this example, price begins an uptrend at A, but it's too soon to place an elevator stop.

At B, it's clear the stock is making a strong uptrend. Place an elevator stop a penny below the low at B.

At bar C, raise the stop to a penny below the day's low. At the close of bar D, raise the stop again. At E, the stock triggers the stop at F and cashes you out of the trade. In this case, you sell on the day price makes a high and drops thereafter, but the stop price is at about 97, two points below the high of 99.

This chart looks more complicated for the elevator stop, so let's go through it.

At A, the stock is in a strong uptrend. Place an elevator stop below the low at A. Notice at bar B that the stock makes a higher low but a lower high. It's an inside day, but it doesn't affect the elevator stop. Raise the stop to a penny below the low at B.

At C, the stock has a low price at the same price as the prior bar. This is why you should never place a stop loss order at the same price as the day's low. Place it a penny or two (or whatever value you wish) below the current bar's low.

Bar D triggers the stop. In this case, the sale price is below the high at F, so the exit isn't ideal.

Here's another chart where an elevator stop takes you out of the stock prematurely (before the trend ends).

Price begins the uptrend at A. At C, it's obvious the stock is rising quickly, so start using an elevator stop.

The day before D, the stock makes a minor high. At E, the stop triggers, taking you out of the trade. In this example, the retrace is short-lived and price climbs to F.

Price at A has been moving higher long enough in a strong move so begin using an elevator stop.

Notice how many higher lows occur from A to B. All you have to do is raise the stop each price bar, never lowering it, as price climbs.

The day after B, the stock tripped the stop and cashes you out of the trade (C). That's well short of the peak at D, but notice your stress level. You don't have to agonize when to sell because the elevator stop handles that for you. It allows you to ride the uptrend.

Here's an example of where the elevator stop fails.

The stock begins an uptrend at D, makes a higher low at E. At A, it's clear a strong push higher is occurring. Begin using an elevator stop. The next day, B, the stop triggers at C, taking you out of the trade. The stock resumes the uptrend, rising from 175 to 210 or so.

Pull up a handful of your favorite charts and look for strong uptrends. Notice how the low prices climb. If you trail a stop below each day's low, you can exit near the uptrend's high.