Rule of Eights

Rule of Eights

The concept behind the Rule of Eights is simple. If you take any move in a chart (low to high) and divide it into eights, you are going to see the market react to these lines. If the chart violates a line, it is likely to start trending in the other direction and the trade should be exited.

There are two approaches to using the Eights Tool.

The first approach is based on Gann Levels. Select the Eights Tool from the toolbar, click the prior relative high and then drag your mouse cursor to the relative low (or vice versa). It will automatically divide the range into eighths. As price moves past an eighth line, move your stop up to the prior eighth. For example, as you pass 3/8 , move your stop up to 2/8. You continue to follow this practice until you are stopped out.

The second approach is similar, yet uses ATR (Average True Range) calculations to determine the distance between the each level, like the Eights stop.

Once price has moved to the gain side of a trade, Profit Stops maximize gains without over-reacting to retracements.

With the Eighths Stop, once price crosses an Eights level (defined by ATR’s), the stop is raised to the previous Eights level.