Is it good to use a trailing stop?

Beginner Questions
6

Trailing stop is good for diversify strategies in portfolio

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7

If you use trailing stop, you can consume more pips by making the best use of market opportunities.

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8

How come? Why do you think it’s not ok to use a trailing stop?

9

Do you set a particular number of pips for your trailing stop?

10

Thanks. I also noticed this which is why I asked if it’s good to use a trailing stop.

11

i know you weren’t asking me, so please excuse me for interfering!

for what it’s worth, if anything, i offer my own answer to that question

i have four reasons (listed below very much in order of importance!) why it isn’t ok for me to use a trailing stop

  1. every single time i’ve ever tested it, over the decades (and i’ve really done a lot of backtesting and forward-testing of trailing stops, because superficially they seem so attractive!), i’ve found that everything i’ve ever done has performed better, overall, without an automated trailing stop than with one

  2. all my previous colleagues, many of them very successful traders, have found the exact same thing

  3. all the authors of trading textbooks i trust (that’s not many!) have explained that that’s so, too, and some have explained why

  4. counterparty market-maker brokers who win when you lose absolutely love their customers to use trailing stops and they promote, facilitate and encourage them at every possible opportunity

for me, the bottom line here is that because they sometimes seem to work well, it’s very easy indeed, without meticulous and accurate testing, to lose track of all the times that an automated trailing stop moves up with your long trade (or down with your short one) just enough to take you out on a reversal before the price then continues in “your” direction

i often trail a stop-loss manually beyond the most recently-formed swing high/low, but that’s a totally different matter, and not one that can be automated - like almost everything else that’s good, in trading, it requires care and attention and work, and involves avoiding automation

as i said, sorry for interfering!

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12

I personally only use trailing stop loss when I have a good prediction about the market. I suggest reading this to explore some of the strategies to use a trailing stop.
https://insights.primecodex.com/trailing-stop-strategies/

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13

Actually we catch the market’s support and resistance level by using trend-specific indicators. If you want to take entries according to trends, trailing stop is useful.

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14

Trailing stop will help you make the best use of upcoming available opportunities.

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15

Thank you for your detailed answer. I appreciate it. It gave me a perspective on things and you’re right. Sometimes that’s what happens, price goes to the opposite direction for a bit then continues on with the original direction.

16

Thanks for this. I’ll check on it later.

17

How so? Does it not limit you instead of being able to take advantage of opportunities?

18

Trailing stops are okay in trending markets or with tight channels. But too many traders set their trailing stops arbitrarily, i.e. “X amount of pips.” This is totally wrong, and you should never do this. Instead, determine your stop based on the swing levels.

For example, in an uptrend, you should set your initial stop below the last higher low. As price goes up, once it creates a higher high, it’s also creating a new higher low, so adjust your stop to just below this new higher low.

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For downtrends, it’s the reverse. Place your initial stop just above the previous lower high, and each time it creates a new lower high, adjust it then.

Since most trends typically only have three major pushes (motive waves), you’ll only be trailing your stop twice.

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19

After achieving break even, I often enable trailing stops with the original SL pip setting (usually from an ATR calculation). Occasionally I’ll scale out as well.

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20

Actually I’ve been trialling trailing stops the other way round - so I set a TSL on the initial position but then cancel the TSL and start ratcheting the SL once the position has reached break-even. The initial TSL price level is set using the prior swing high/low but at a minimum distance of 2xATR14 from entry.

So far this seems a good way to let price show how it is behaving in a trend. If its trending inconsistently, the TSL will be hit but the loss will be perhaps half of what it would have been using an initial fixed SL. Objective at first is to minimise loss.

But if price after entry is trending consistently, the objective after b/e changes to minimising loss of profit. At that point a TSL will only guarantee maximum loss of profit if the trend becomes volatile and inconsistent. In any case, I am aiming to exit an uptrend at a new high or a downtrend at a new low, rather than wait for the pull-back to hit my ratcheted stop.

So far so good.

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21

It all depends on how well you know how to apply this technique.
If you know how to apply a trailing stop correctly, it can significantly increase your income. It can also reduce your losses.
Just imagine if you manage to catch a trend and your stop loss moves behind the price. There’s an opportunity to make a big profit.

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22

if you manage to catch a trend, as you have said, then there’s exactly the same opportunity to make a big profit if you DON’T move your stop loss behind the price, isn’t there?!!! :laughing:

if you trail your stop-loss behind the price, you’re actually reducing the chance of making a big profit, because of all the times that a brief reversal (of the type which is normal) takes you out of the trade before the price heads off in your originally intended direction

THINK about what you’re saying, for a minute, Kubepaal!! and then maybe ask yourself why all those textbook writers mentioned above, and all the professional traders who have thoroughly and meticulously TESTED this are almost universally advising people NOT to use trailing stops … :woozy_face:

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23

If it’s in a trend I would use a tractal trailing on the 1Hour time frame after a certain amount of pips after testing the reversal point.

24

This entirely depends on your strategy. Personally, I would not use an automated trailing Stop - all markets move around a bit, even with the trader being ‘right’ - so for me it needs manual execution. I trail my Stop often if the strategy suits it. For instance, entering a trade off a Daily chart, via an order which triggers overnight, I might trail my Stop at the end of each day, to lock in some profit or to follow the trend. But given trailing too tightly will stop you out even if you call the market direction correctly, this is a classic case of ‘case by case basis’. But sometimes trailing can be great, absolutely.

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25

thanks for this. i will give it a try and observe.