How To Use A Trailing Stop
Not for the faint-hearted
A stop-loss that trails behind price. A trailing stop has been the answer to many traders’ prayers, yet it is so downplayed and overlooked you would swear it was an indicator. Well, it isn’t… This is how you actually use a trailing stop
I’ll be the first one to say I had no idea you could trail your stop behind price until about 6 months after I started learning how to trade, some of you literally just found out. Ain’t no shame in that. Even then, I could tell that it would be a very useful tool but it just took me so long to figure out how to use it.
Trailing stop, what?
You may have noticed on your platform that you can trail your stop by a specific number of pips, and that’s just fine and dandy but that’s rarely useful and even less accurate. Nobody wants to lose more profit than they absolutely have to, or even worse not give the market the space it needs to tango with you. You never want to step on your girlfriend’s toes, especially if she’s offering to give you money.
Trailing a stop using pips may be suitable for a robot or algorithm of sorts which you really don’t have a choice with, and unless that’s you keep reading.
The market/s do not ever base swing points (Significant Highs and lows) on how many pips price has moved. Swing points are based entirely on price levels that the market has DECIDED to respond to. (Making your living based on the whims of an emotional beast sounds smart, I know right!) So that’s what you use. Trail your stop BEHIND (not AT) swing points.
Trailing stop, why?
Now we get to the fun part. Why should you trail your stop loss? Risk Management 101. Protect profits. Protect Profits. Protect Profits. Without getting greedy kids. How many times has price moved in your favor by a mile only to come back and trigger your stop loss?
Too many times than is appropriate to mention? YOU ARE NOT ALONE. That is the nature of Markets, they move up and at some point, they have to move down. That does not and should never concern you! Your Job is to get into those moves and lose the least amount of money you can possibly lose and keep the most profit you can. Yes. Keep!
Using a trailing stop guarantees that you will almost never get out of a trade at the highest price (Maximum Favorable Excursion explained in the article on scaling in) and for some reason, that statement always gives new traders a spasm in the neck. You need to realize that being consistently profitable is not trying to prove you have the biggest coconuts on the beach. It is showing up at the beach every day and leaving only when the sun goes down.
To be consistent you have to trade in a consistent way! Say it with me… TO BE CONSISTENT I HAVE TO TRADE IN A CONSISTENT WAY. Trailing your stop allows you to do that. The market has already shown you where people are willing to buy (Higher swing low) and if price gets back there and people don’t want to buy anymore. The sun has set. Simple
What you’ve just read explains why a trailing stop protects you. When done correctly a trailing stop will make you more profit than any Take-Profit order ever will. Unless you are only entering on the break-out, in a long position when price breaks a previous high that means buyers are on your side and you’re are in profit.
Take your stop from whatever it was to B/E (Break-even) on the premise that the high that was just broken should now work for you as some kind of support, and if not, THE SUN HAS SET. You don’t determine when the sun sets. It could set at 12 Noon, don’t get caught with your pants down. On a really good day when the trading gods look upon you with favor and are pleased with your consistency, the sun may never set. The beams will shine warmly on your face and nourish your bottom line and this will be because we do not ever… EVER cap our upside.
A trailing stop allows you to protect profits while allowing the market to move EVEN MORE in your favor if it so wishes.
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.