Please let me know what you think of this trailing stop strategy: Place the TS 1 or 2 pips behind the Stop Loss. As the price moves in my direction, the TS will follow it into the profit zone, thereby quickly securing a little profit. Then, as the trend continues, I can gradually increase the distance between the TS and the price until I feel I’ve reached a balance between avoiding being stopped out by pullbacks and losing potential profit by being too far from price.
As I feel that the trend is approaching its peak, I can reverse the process and gradually tighten the stop to secure more profit - but the main part of the strategy I’d appreciate assessment on is above, in the first paragraph. What pitfalls/benefits do you see? How may I improve it?
Come to think of it, instead of putting the TS an insignificant 1 or 2 pips behind the Stop Loss, why don’t I simply use the TS instead of the Stop Loss? Any thoughts on that? - But it’s still the first paragraph that I’m most concerned about.
With most (in fact with all but one) of the methods I’ve ever tested it for, Norm, it’s actually been an overall profit-loser.
Surprising, at first, perhaps.
Trailing stops always [B][U]sound[/U][/B] very attractive, because they appear to be a way of locking in profit and limiting future loss while allowing further profit to develop if the move continues. [I]Most[/I] appealing?! [I]Unfortunately[/I], however, in the long term (which is all that matters, with trading) the reality tends to be rather different. There are reasons for that, of course, but they take a bit of experience to understand (took [I]me[/I] years, anyway).
For myself, when I leave the last portion (often about the last third) of a trade to “run, in profit”, I trail its stop-loss [I][U]manually[/U][/I], just above/below its most recently-formed swing-high/low (i.e. volatility-related and S/R-related as well). I find this an incomparably better approach.
Your responses are very surprising, but I’ll certainly take them into serious consideration. Lexys, I’ll follow your link for greater detail. TURBONero, if you can provide me with some technical understanding as to why trailing stops don’t work, I would truly appreciate it.
there are 3 golden rules that are the hardest to learn when it comes to trading. if you manifest those 3 rules in your head you will always be makong money no matter what you are trading or what strategy/trading plan you have. best strategies dont help you as long as you validate the 3 rules.
Emotionally unattached to your trades
patience out of steel
let profits run and cut losses short
sounds very easy but those 3 rules are against everyone humans natural behaviour thats why they are so hard to follow.
trailing stop loss automatically validates 2 of these 3 rules in itself.
especially for people who are trying to make 20 pips or so (small gains) a trailing stop loss is mathematically amd statistically a guarantee that you will not reach your take profit target. instead you will be stopped out earlier at a RR ratio that is not healthy for you. that gives you a disadvantage in the trading meaning that you must be right more often then you are wrong.
simple rr ratio meams having the benefit of beeing wrong and still making money.
if you have a risk of 10 pips amd a reward of 30 pips every trade and you strongly stick to it you habe the advantage that only 25% of your trades must be winners in order for you to not loose.
TSL more often throws you out much earlier than the target you need. yes youmight be happy for the trades that didnt work oit the way u planned but it aswell is the same forvthe trades that did work out and would have yielded you 30/40/50/60 pips.
in order to use TSL you must face marker volatility much more and much more professional than before.
when you look at charts in the retrospective some strategies seem good but when the chart is on the making (on the bid) then things are different.
you dont need stats or to take my word as advice. just try using trailing stop losses for a month on a demo account and see what the outcome is.
So glad I read this post. Ive been trying to figure out how to work a trailing stop into my strategy and still haven’t figured it out…they ALWAYS stop me out early. I can now put that whole annoying strategy behind me.
Whilst I agree that trailing stops are not a good idea in general I would add one possible exception here.
In my opinion, I think it can depend on what is the purpose of the stops in question. In addition to the normal concept of a standard risk/reward stop, a stop can also be either:
a safety mechanism (or damage limitation) designed to protect in the event of a sudden major move.
an integral part of the trading method designed to close a position after a significant reversal,
The stops in the former category are not actually intended to be hit at all. Trade exits are usually totally manual either when a target is reached or when price retraces to a level that invalidates the trade’s purpose. This kind of stop is rarely hit. In these cases there is a justification for using a trailing stop because it will always be quite distant from the current price and thus relatively safe from spiking but will maintain the “safety net” distance at a similar distance. However this is a pretty thin argument and not very relevant if it is not intended ever to get hit under normal conditions.
But the stops in the latter case are a different matter. Their purpose is to get the most out of a long trend by waiting for them to eventually [I]get [/I]hit once the move is over and a reversal takes place. The problem here is that the stop has to be a significant distance from the initial position in order not to be automatically tightened up too much during any early “wobbling” of price and to avoid accidental activation as a result of spiking. But the paradox is that by the same token the market has to reverse quite a distance from its peak before hitting the stop and thus a large part of the move is sacrificed. In other words, it is not that the TS “does not work”, it works fine! But it is just a very inefficient way of exiting.
Another point is that a TS just maintains a certain distance from the latest price extreme whereas a manual stop can be adjusted whenever a logical change occurs in its relevant positioning e.g. a new interim candle high or low. Some TS move pip by pip with the latest new price extreme, others can be set in steps e.g. moves every 10 pips.
On the whole, I don’t personally see much value in TS, especially for short term trades and especially if one monitors one’s trades manually. And I think there are usually better ways of setting exit criteria than simply waiting for the market to back-track sufficiently to hit an arbitrary stop level.
