I was wondering if anyone could share some insights into their thoughts when it comes to trailing stops to lock in profits.
I understand how a market structures and the basics of trailing stops, I am interested in hearing particularly from people who have insights on how to prevent high water mark DD brought about by winning trades coming back against you.
I was wondering if there is a point where rather than using price action, there are arbitrary points to lock in profit, even if the price action does not “suit” it.
For example, let’s say a trade uses an average of 1:5 RR and uses 1% risk per position. They take a hypothetical trade where they risk 20 pips to gain 100, the trade goes 80 pips positive.
So, the trade is 4x up, if price had broken a shorter term SR level it was possible for it to retest and this would be a 40 pips retracement, would you think the smartest thing to do here would be to pull stops tight since if it is going to retrace to that level, you have to risk 40 pips when you only have 20 pips to gain. In this hypothetical example, would you think it best to lock in the profits and then perhaps buy again on the retest (assuming you risked 20 pips on buying again even if you lost you’d have banked more pips than you’d have if it retraced).
If for any reason you could not actively watch and adjust your trades, would you set an automated trailing stop based on the concept it is better to get stopped out on too shallow a retrace than on too deep a retrace?
How do you find the balance between preventing HWM equity DD but also leaving yourself with the best chance to get paid on your high RR trades that are running well?
No, I wouldn’t, because I’ve never yet seen a trading system, method or style for which automated stops can’t fairly easily be outperformed by some pretty simple alternative method.
I see their superficial attraction, of course, and I completely understand why counterparty brokers encourage their customers to use them.
By actively watching and adjusting my trades, trailing the stop-loss manually.
Agreed, I have also always thought of them as inefficient, perhaps with the exception of rapidly chasing price moving very strongly off a news event or something but these are rare. [quote=“LaughingCharlie, post:2, topic:110786”]
By actively watching and adjusting my trades, trailing the stop-loss manually.
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If you do not mind me asking, do you tend to do this pretty aggressively or do you prefer to wait for price to pull back and then expand into a new high/low and trail up the stops using that newly formed structure?
I do this. In a long trade I move the stop loss up to a couple of pips below the latest swing low, and the converse for a short trade.
This has always outperformed whatever else I’ve tested.
I know that an automated trailing stop can be proportional to the volatility (by working out its size from the ATR) and I see that that sounds good, but I think many people are fooled by the fact that it sounds good and are sometimes taken out of potentially successful trades far too early by using them.
It makes much more sense to me for the stop loss to be related to local support and resistance than to volatility. At least, I think that’s why what I now do outperforms other methods.
When unrealised gain on your position is so great it suggests you should apply a trailing stop to protect profits, it is also saying you can increase the size of your position for no extra risk beyond what you had already budgeted, but potentially make much more profit.
I’ve also noticed trailing stops using the atuomated feature tends to get your stops whipsawed because they trail in the retrace zone. Using the ATR is a good idea but when you are trailing stops on a position your ideal scenario is momentum coming in and if you are trading from a range into a breakout, the ATR is oobviously going to be less valid since its tracking the range bars and not the move you are trading. I’d only consider it under the circumstances I literally would be unable to follow price moves, like when I am sleeping.
With what I am wanting to do, there is a focus on keeping the equity DD as low as possible and re exposing to initial risk does not really suit this.
EG, if you are up 3x risk and lock in that at breakeven and add 1x risk, price moving against you causes you an equity DD of 4x risk, a few losing trades after that happening could push very close to the DD limits I’d want to keep in.
This is the main thing I want to prevent, equity profits becoming large equity DDs seems to be a risk needing dealt with if using high RR.
I think the solution comes in pre planning where to look for areas to trail stops and distribution of targets to secure profits along the way.
I find that waiting for +3r profit never comes so my doubling up would be at +2r. But I wouldn’t set the stop on this first position at b/e, I would set it at +1r, then add a second trade with a stop on that at -1r. So you end up with a bigger position with potentially much bigger profits, but DD remains always no bigger than -1r. In fact, if price keeps going you can re-set stops again and add another trade - now the worst that could happen would be b/e, but the upside potential is significant.