Four Favourite Trailing Stop Methods

A really great method that traders can learn to use to their advantage is the trailing stop.

The premise is simple, as price moves in your favour heading toward your target, trail your stop (i.e if long, trail your stop higher and if short trail your stop lower) so that if price retraces you still lock in some profit. It can be extremely frustrating to exit a winning trade because you “feel” like the market is about to turn against you and similarly it is just as frustrating to see price come within pips of your target only to reverse and trade all the way back to break-even.

This is where the trailing stop comes in and is a brilliant way of balancing the odds of these situations. However, trailing stops are a fine art; trail too tight and you may as well be exiting because it will surely get hit, trail too wide and you risk not really taking as much profit as you should out of a move.

There are also a number of ways that you can trail stops, so how do you know which is the right one? Read on as we discuss some of our favourite trailing top loss methods.

1. RISK:REWARD

One of the methods that we use a lot in our Forex Mastercourse is what we call the “risk:reward” method. Simply what we are looking to do is enter our trade and set a stop loss and then mark target levels on our charts which are multiples of our trade risk.

We then look to move our stop to break-even once target 1 is hit (1 x risk), as price moves to target 2 (2 x risk) we trail our stop to target 1, locking in at least 1 x risk if price moves against us. If you tend to trade with trend as we do then this is a brilliant method to use and can lead to some really impressive results. It’s a great way to approach trailing stops and teaches you to always be thinking about working in terms of covering risk and achieving multiples of risk, so that you keep a healthy risk:reward ratio to your trading over the long run.

In the example below we can see that if we had sold the breakdown in EURUSD, using the risk:reward method would have kept us in the entire trend all the way down to 9 x risk. Not a bad a return!

2.ORDER FLOW TRADER

Order Flow Trader can be a really effective tool to use when looking for trailing stop loss points. The coloured bands surrounding price are indicating the volume flowing into the trend and the dots suggest a stop loss point based on the strength of the trend so where these dots are breached, the trend is likely to end soon. Using these points completely removes the hassle from analysing the market for stop loss points and you quickly develop a profitable system using this method.

In the example below we can see that OFT keeps us in the short trade for a really profitable run before price trades up through the dots and turns bullish.

3.MOVING AVERAGE

One of the classic trailing stop methods used by traders the world over, moving averages can be an extremely effective way to trail your stops and again, work really well if your trading with trend. The key thing with this is to have a play with some different MA periods and find the one that suits your trading style, the time frame you trade, the holding period you typically have. Some of the popular ones that people use are the 21, & 55 Daily MA’s, 50 & 200 H4 MA’s. An important point here is not to set your stop at the MA itself but to set it slightly behind so that you allow for a retest of the MA which often leads to trend resumption.

In the chart below you can see that if we sold the breakdown from highs and were in that bearish EURUSD trend then the 55 MA worked perfectly as a place to use for trailing stops.

4.SWING POINTS

Trailing your stop loss structurally is always a great thing to do and by that I mean taking into account the key local support/resistance levels and key swing points. These areas in the market are extremely important for reversals and trend resumption and so can really help us to identify effective trailing stop loss points. The idea is that, if we are in a long trade, we look to trail our stop up beneath each significant low so that we have a good level of protection if the market turns and so that we also lock in decent profits too. Now, it can be difficult to begin with to identify these swing points and the key is to only stick to the main ones, as trailing behind minor swing points will sabotage your trade. Fortunately NinjaTrader have a fantastic free tool that can help you out here. The indicator is called swing and it highlights the key swing points on your chart for you.

In the example below we can see that had we taken the breakout trade we would have used swing to identify the recent swing point for our initial stop and then moved our stop up to just beneath each yellow line marking the significant swing points (great thing about this tool is that you can change the settings to identify swings of different magnitude based on number of bars to look for in a swing, very handy tool!)

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