Should I Use The Trailing Stop?

Hmmm, the much maligned trailing stop. Do we use it? If so, how do we use it?

They say that if you stand back and look in the mirror, then what you see is the product of all the decisions you have ever made in your life. Granted, some of them will have been made for you when younger, but generally speaking.

Likewise, it is the same in trading. Your account is the sum of all your trading decisions. Nobody else’s. Yours.

There is absolutely no one else to blame.

Nope. Even allowing another to trade your account it is still your responsibility.

So, having placed that burden upon yourself, and taking back control of your account, it makes excellent sense to study and learn every tool at your disposal as if studying for a degree. If you do not, the university degree will be far cheaper in the long run.

You really do need to know EVERYTHING about each tool that you intend to use and if it will work for your style of trading. The Trailing Stop is one such tool, but do we use it as we should?

This is a very difficult question to answer – there are so many different types of traders, for example: Day traders, Swing traders, Trailing stopPosition traders, News traders, Tick traders, Scalpers, Robotic traders, etc. etc. Multiply these by the number of strategies and methods, and then begin to look at the risk tolerances of each trader – all different. So a trailing stop will have a totally different meaning to each one. If they use them at all.

I would imagine (I have no data to back this up) that many traders simply enter a trade and, after setting their stop loss (I hope), they then set a trailing stop of X amount of pips usually when the trade is only seconds old and let the trade unfold without so much as a thought. Yes, I have done it.

This is not really constructive trading. It’s more like ‘hit and hope’.

I have found that using a trailing stop in this manner is probably your worst enemy. If not, then fairly close.

The Use of the Trailing Stop at Black Dog

Within our course modules there is little in the way of information regarding the use of the trailing stop. But why?

Well, I can only speak from a personal level but my trading has always been on the M15 time frame for forex, or the M5 for the Indices. Targets are hit fairly quickly or the trade reverses for a small loss. Either way, a trade is only open to the foibles of the market for a relatively short time, a few candles only.

Nevertheless, there are occasions when a trailing stop comes in handy as we’ll find out shortly. I am starting to use them, not always, but more frequently and only on particular occasions.

Stops

The lesser-spotted, bog standard stop loss is a MUST when trading, but we all know that, don’t we?

The ramifications of not using a stop loss do not bear thinking about. If you are having problems with stop loss placement please read this post Where To Place Your Stop Loss? This should remove all doubt.Trailing stop

This type of stop loss is fixed and doesn’t move until YOU move it. You may move it at ANY time during the trade to another fixed point whether you are in profit or not. At Black Dog we often move our stop loss from, say,  -15 pips to +2 pips. There is actually not much point in moving the stop loss to break even as lots of traders do. You want something out of the trade for your efforts even if only 2 pips.

Make placing your initial stop loss the first part of your routine for entering trades. A very close second is where you are going to exit. All this info can be obtained from the ATR mentioned in the link above, including the size of your trailing stop.

Ok, ok – I know we’ve gone through all this in that previous post but it’s no bad thing to mention it again. Don’t forget to read that blog post again, the one just above. Let’s get back to Trailing Stops.

Do Trailing Stops Lower Risk? Do They Increase Profits?

There is always risk when trading, even if you are well into profit.

The risk is that half those profits could evaporate in the blink of an eye. Your friendly broker, who wants you to cream as much as possible from him(!), loves to use the phrase ‘Lock in Profits’ when talking about the Trailing Stop feature – it is good advertising. I just love that phrase. It gets traders throwing money into their accounts, using the trailing stop … and losing money..!!

But will I see an increase in profits if I use a trailing stop?

Well, yes and no. For me, it is doubtful. It depends how you use it. Personally, I think the trailing stop could be your worst enemy if you are not careful in its use. The thing is, like all tools, you have to use them correctly. I believe that simply entering a trade and setting the trailing stop as a matter of course is not the correct or best way to use it.

An Imaginary Trade

Let’s do a thought experiment. I like these cos they are cheap and only involve a bit of text, and thought.

Ok, I enter a trade to the long side because all my tools tell me when and where to enter. Fair enough, done that.

Within the blink of an eye I have set my fixed stop loss. The size depends on the ATR. Done that too.

(Within our Trade Management module we have ways and means to keep losses to an absolute minimum if the trade should reverse and go against us).

Set a trailing stop? No thanks. Not yet at least. The trade now starts to go our way.

When I get to being a certain amount of pips to the good, I will not let the trade become a loser. No matter what.

Ok, move the fixed stop to represent this. This is effectively now a free trade. Done.

This imaginary trade is a very good one. As it moves higher I give it plenty of room, breathing space, as it zigs and zags to the upside. After all, it cannot be a loser now!

Move the fixed stop loss accordingly, but NOT too close, until…

What I am actually aiming for is 20 pips, that is the minimum amount of pips that I want from the trade. But I do not close the trade when it hits the 20 pip mark.

I actually have an imaginary target of 30 pips which is the point where I will activate the trailing stop of 10 pips. I do NOT set the Take Profit feature.

This actually means that I would be happy with 20 but I will take whatever extra the market throws at me. Once the trade hits the 30 pip mark THEN I activate the trailing stop. In this case with a trailing stop of 10 pips.

My 20 is locked in and I can sit back and see what the market is blessing me with. I have already achieved my 20 pips and I am ecstatic – anything else is a bonus which the trailing stop will deliver. It will either drop back and hit the 20, or carry on and make a few more pips, hopefully past the 30 mark. Either way I can sit back and relax.

But there is still work to be done, mind. There may be a strong resistance level approaching, or big news announcements due, or New York may be about to open. Whatever, you need to be aware of these and trade accordingly. Do you let the trade run? Or be happy with the (now) 34 pips that the trailing stop has ‘locked in’? You just need to be aware of what is going on.

Another use of the Trailing Stop

WeTrailing stop‘ve all experienced this at one time or another. Your trade is moving at a rate of knots because of a news announcement you forgot about, and you are over 100 to the good. There comes a point fairly quickly when the large candle that you are watching starts to reverse on itself and you begin to think that you should be closing this trade, pronto.

The trouble is that with some brokers they keep throwing requotes at you. Time after time, as you watch those hard-fought pips disappearing. You are wanting to close the trade but you keep getting requote after requote because the market is just moving too fast. By the time you have clicked on the ‘Close Trade’ button, the market has retraced another 5 pips..!! And then you get another requote.

What to do?

You could alter your fixed stop but with this fast moving market it is miles away and besides, you are now all fingers and thumbs as you try to get the right price on your stop. It takes time and may cost you 20 pips.

It may be reversing some and, if it is a news announcement, it could be reversing pretty quickly.

One ploy or stratagem is to use the trailing stop. But at the smallest possible size. The market hardly ever moves up, or down, in a straight line, there are always zigs and zags which will hopefully fire your new trailing stop of 1 pip(!) and close the trade for you without it reversing too much. Try it.

Conclusion

I’ve jotted my thoughts down here on the way that I use the trailing stop – but I must also confess that I use this tool very infrequently in my trading. As of writing, I am hardly trading at all due to the state of the markets – but this will change in due course. I also confess to moving my stop as described in our Trade Management module as I feel much safer in this respect.

Nevertheless, the trailing stop has its place in trading but please be careful how you use it. I am not the greatest fan of this tool and maybe the wrong person to write about it, still, it’s just a few thoughts. Maybe I should use it more? We’ll see.

If you have any ideas or strategies on how you use the trailing stop, or have good or bad experiences, I would very much like to hear about them. Or please feel free to comment below.

2 Comments

  • Joachim Braun

    21/07/2016

    Hi Dave,
    thanks for the post – I have one question, which I wanted to ask already a long time. You talking about to use the ATR for example, the SL or TP or also how far from Channel.What confuses me is, that the SL is very often much bigger than 10 or 15 Pips. You love to close the trade in the end at 10 +-, when it runs against you.
    So, what should I do now, take the SL from the ATR, when it’s, for example 25 Pips and close anyway at -10/-15, or let the prize run to -25? For what setting the SL to 25, when I close anyway at -10/-15. Do you use the ATR Display for you SL Settings? And how do you use it …?
    Best regards,

    Joa

    • blackdogdave

      21/07/2016

      Hi Joa

      Good question but please have another read of the modules and the ATR post.

      The fact is, just because there is an ATR suggested stop loss of, say, 25 pips there is no way that I am going to lose that amount. It is pretty simple, if the trade starts to look ugly – bail out.

      The ATR is an indicator, it only guides us. But it’s a good indicator.

      There is plenty of info in the Trade Management module.

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