When to Use What Trailing Technique

Trading Discussion Risk Management Practices
1

Aloha Dudes and Dudesses,

Without a doubt, one of the greatest concerns for traders is when and how to exit trades. There are a couple of set and forget techniques that I’ll share at the end to round out the picture, but what I’m about to share on how and when to use various trailing techniques for active trade management is based on my number one takeaway from an eye-opening (for me) article by Rayner Teo: How to Set a Trailing Stop loss order, to Protect Your Profits and Ride Big Trends.

My biggest takeaway is that it makes a lot of sense to shift trailing techniques based on current price action.

What you’re about to read is a modified copy of my notes. To get it from the horse’s mouth (no offense Rayner :grin:) - read his article. What’s in parentheses are my additions. And of course, this is not an exhaustive list.

EXITS WHEN MANAGING TRADES

PRINCIPLE: CHOOSE BEST TRAILING TECHNIQUE, OR SHIFT TECHNIQUES, BASED ON CURRENT PRICE ACTION

WHEN TO . . .

  • TRAIL SWINGS. Where market has clear pullbacks in a trend, trail behind swings.

  • TRAIL MOVING AVERAGES. If price action isn’t clear, trail behind a moving average (or Bollinger band, etc.).

  • TRAIL X NUMBER OF CANDLES OR A SERIES OF TRENDLINES.
    If price goes parabolic (sharply curves upward or downward & candle ranges increase) moving averages will lag way behind, so can trail behind . . .
    A) X NUMBER OF CANDLES: 1, 2, 3 , etc., - or shift the number of candles based on candle size
    B) OR A SEQUENCE OF TREND LINES AS PARABOLA PROGRESSES.

  • ATR. TO TRADE “SYSTEMATICALLY" (as opposed to shifting techniques based on price action) trail by a multiple of ATR behind the tail. He suggest 1, 2 or 3 ATR.

WHAT FOLLOWS IS TOTALLY MY ADDITION:

SET & FORGET EXITS

  • SET A PROFIT TARGET

  1. SET A STANDARDIZED REWARD:RISK
    Per How to Calculate Risk/Reward Like a Pro - My Trading Skills, “Trades with R/R ratios of 2:1, 3:1 or even 4:1 have shown to be the most effective setups in the market.” (Advantage over ATR: It’s specific to the price action that determines the stop loss, which in turn, is the basis of the R:R. - I must add that no less of a trader than Kathy Lien says, concerning even 2:1, “The market is not always that generous.” Some successful traders say they get the best results with 1.5:1. So, the ball’s in your court.)

  2. SET A PROFIT TARGET WITH A MINIMUM R:R RATIO BASED ON PRICE ACTION (AS OPPOSED TO SETTING, E.G., 2:1 ON EVERY TRADE.)

  • TRADE THE DAILY TIME FRAME OR HIGHER. Trading these frames is not strictly Set and Forget, but with the daily, one just needs to check and manage his trade once a day, which is pretty darned close.

Well, I hope this helps some.

Norm

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2

Nice summary @NormanA. I respect Rayner’s Youtube clips - he has a great way of cutting to the heart of trading issues.

3

Yeah, he’s good.

Thanks for touching base, tommor,
Norm

4

Rayner alerted me to the use of ATR20 as a trailing stop and its been very effective on the long-term stuff.

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How many multiples of ATR; and what would you say is the minimum time frame for “long-term”?

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I found 2ATR20 is good but I’m thinking I’d like to trim that to 1.5. 1ATR20 for me was too tight, got bounced out too many times, while 3ATR20 just let trades dither onwards for weeks without conclusion.

There’s also an issue with exotics and sometimes minor pairs (maybe this is just for me as I am spreadbetting forex) - a position size risk of 2% max. is sometimes unattainable at 2 or 3 ATR20

That’s the thing with this game, you put your foot on the accelerator and the road turns icy: you step on the brake and then realise you’re in bottom gear on a 10-mile straight.

7

Very true, especially on stop techniques. On a recent thread I started, an experienced and profitable trader mentioned that he is still getting jacked around (my term) with trailing techniques; so it’s like riding logs down a river. You jump from log to log and hope that you always land on a log.

I view learning how to trade like learning how to ride a bicycle. Can you imagine a cyclist going through all sorts of complicated mathematical calculations to decide exactly at what angle to lean to the right or left before turning a corner? Nope. You just get better the more you do it.

Take care,
Norm

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8

Good read, but too complex for me. Not that i don’t understand it, but too many things to worry about.

Here is a how i handle trailing.

  • If i am satisfied with how much price has moved in my wanted direction, i close a portion of the trade, and move the SL to break even.
  • If i see that price is not moving in my direction, and it’s just kind of flip flopping sideways, i trail my Stop Loss to the same pip amount that i am in profits, this is just to ofset the risk a little bit.
  • And if i am really suspicious of the market conditions, i will zoom in the smaller time frames, trail my stop loss above or bellow the first significant infliction point - one time frame bellow the one where i spotted the trade.

This keeps my trailing Stop Loss policy simple and clean.

9

Hi Pip-Skywalker,

That’s a good way of tightening the stop and still allowing trade to run.

Take care,
Norm

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