Traders use Trailing Stop Loss to capitalize on trends and maximize profit per trade.
In reality, no one knows when the trend will end.
Therefore, if you set a take profit price, you will lose a lot of profit if the price keeps moving in the direction you expected.
Trailing Stop Loss allows you to follow the market and ride big moves.
Before we get into the actual method, let’s first look at the pros and cons of using Trailing Stop Loss.
Advantages of using Trailing Stop Loss
The biggest advantage of using Trailing Stop Loss is that you can make profit in a systematic way.
This has great psychological benefits.
Without a plan, you may tend to doubt yourself and feel like you missed out on the benefits.
In other words, you have FOMO, or fear of missing out.
But with a tested plan, you know what to expect.
So, even if one trade doesn’t go your way, you can still make more profit through many trades than if you didn’t use the trailing stop.
Disadvantages of Using Trailing Stop Loss
Using a trailing stop loss does not guarantee that you will make more money.
Therefore, you should test the trailing stop on entry to see if it is suitable.
A potential drawback of a trailing stop is that it ends when the price retrace, thus giving up profits.
For some traders, this can be difficult to deal with on a psychological level.
Ask yourself if you’re willing to give up some short-term gains in exchange for the potential for more gains on big moves.
Another drawback is that you may find that it breaks even more often.
There is always a trade-off between getting more profit and having a higher win rate.
If you are the type who likes high win rates, trailing stop may not be for you.
However, if you prefer maximizing your overall return and don’t mind a low win rate, you should consider using a trailing stop.
Now that you know the pros and cons, let’s talk about proven methods you can use.
1. Close above the moving averages
A close price on the opposite side of the moving average is one of the easiest ways to track your stop loss.
Finding closes above the moving averages is easy, so there is no room for overthinking or interpretation.
For example, let’s say you shorted with the arrows in this chart.
![short trade](https://www.tradingheroes.com/wp-content/uploads/EURUSD_2022-10-31_23-28-20.png)
You may be tempted to exit on the first drop or first retracement.
However, by using the moving average as a trailing stop loss, we could have made more profit by waiting for the closing price to rise above the moving average, as shown above.
Obviously, there are different types of moving averages and different settings.
If you’re not sure where to start, try these three settings and see how they work.
- 20 period exponential moving average
- 50 period exponential moving average
- 100 period exponential moving average
Backtest different moving average settings to see which one is the most profitable.
Then don’t be afraid to test your own setup based on your observations.
2. Risk of multiple trailing stops
Another trailing stop method that is less talked about but very effective is the risk multiple trailing stop.
The concept is simple. Track your stop loss whenever the price is a multiple of your stop loss in points.
For example, let’s say you had a stop loss of 100 pips when you opened a trade.
This is the risk multiple, also known as the R multiple.
In this case 1R is 100 pips.
Therefore, if the price hits a profit of 100 pips, the stop loss can be traced to break even.
From there, if the price hits a profit of 200 pips (2R), the stop loss can be traced to a profit of 100 pips (1R).
This is a good place to start, but you can also use different risk multiples to move your stop loss.
We may move the stop to breakeven when the price hits 2R.
…or you could start trailing your stop loss by 1R as soon as the price hits 3R.
There are many possibilities to experiment with.
To take the work out of trailing the stop loss with R, our MetaTrader Trailing Stop EA You can easily.
A trailing stop is automatically set as soon as you start trading.
In this short trade example, the EA will move the stop loss to breakeven when the price reaches 2R and drag the stop loss by 1R when the price reaches 4R.
The best thing about this method is that it automatically takes into account market volatility.
If the market is unstable, the stop loss will be wider and the R level will be wider.
That way, you can ride through erratic spikes more easily.
When the market is quiet, the stop loss is smaller and the price needs to move less to reach the R level and start securing profits.
3. Moving average crossover
When the moving averages cross, it could indicate that the trend is nearing its end.
A popular moving average crossover trading strategy is the golden/death cross.
It is typically used to trade stock market indices, but can be used in other markets as well.
The best thing about this trailing stop method is that it is very precise.
It’s obvious when the moving average lines cross.
No analysis or discretion is involved.
Close the trade as soon as you close the candle with the crossover.
4. Support and Resistance
Support and resistance levels are a great way to track your stops.
These levels take into account the current volatility of the market and are usually easy to find.
Below is an example of how to track a stop loss on a downtrend in EURUSD.
The only real downside to using this method is that it involves some discretion when drawing support and resistance levels.
You need to be patient and raise your level of support. Otherwise, you may set your stop loss too early and stop out prematurely.
To prevent this, look for a strong move away from the level before moving your stop loss.
5. Parabolic SAR (PSAR)
If you prefer indicators, the PSAR is another easy way to track your stop loss.
This indicator provides clear levels for setting stop losses on all candlesticks.
In the chart below, the PSAR dot is the level to place the trailing stop loss.
Traders usually track their stop loss two or three levels back so that they can ride the trend.
On the downside, PSAR tends to be a bit more sensitive than other trailing stop loss methods, so it may fail to capture long-term trends.
To compensate for this, you can either lower the sensitivity of your settings or use the indicator on higher timeframes.
For example, you can use PSAR on a daily chart to track your stop loss even if you are trading on a 4-hour chart.
6. 3 candle exit
This method is best suited for markets that tend to have strong breakouts as it tracks the stop loss fairly tightly, but the price bounces back quickly.
Here’s how it works…
Once your trade is profitable, track your stop loss by:
- Your stop is a short trade above the 3rd candle high
- Your stop is a long trade and falls below the low of the third candlestick
Move your stop loss on every new candle printed.
As you can see, the stop loss fluctuates according to the price, so you can take advantage of the large candlesticks.
But as soon as the price starts to correct or retrace, you will be stopped and take your profit off the table.
Below is an example of a short trade.
This short trade is profitable, so it’s time to start tracking the stop loss.
Count 3 candlesticks in the current candlestick.
Then place your stop loss above the third candlestick.
Each time a new candle closes, the third candle moves forward as well, moving the stop loss accordingly.
It’s easy?
7. Percentage Retracement
The final method I want to share with you in this tutorial is to exit a trade after the price has retrace a certain percentage of the high or low of the movement.
This method is slightly different from the others above in that it uses the last extreme move.
So let’s say you decide that a 12% return in price is the right time to close the trade.
Here is a long example where the price has retreated 13% from its high of 86.38.
If you used a percent retracement trailing stop, you would exit just before the price fell to 70.
Make sure to do extensive backtesting on the markets you trade to find the best retracement settings to use.
This method is usually used in the stock market, but try it in the market you trade.
Remember, every market has its own personality, just like us humans.
Therefore, it may be necessary to use different retracement settings for individual markets and even currency pairs and stocks.
Do not use trailing stop
Knowing which trailing stop methods to avoid is just as important as knowing which trailing stop method to use.
There are two common trailing stop loss methods to avoid.
fixed point value
The first method that is sometimes taught online is to track your stop loss with a fixed point value.
Suppose you set a trailing stop value of 25 pips.
Every time the price moves 25 pips, move your stop loss 25 pips and take profit.
This sounds great in theory and is easy to implement.
However, it does not take into account the volatility of the market you are trading.
25 pips can work well if you trade low volatility pairs like EURGBP.
However, if you trade a volatile currency pair like GBPJPY, 25 pips is probably too small and you will experience a lot of stop-outs.
The bottom line is to avoid using fixed trailing stops.
Trailing stop built into the trading platform
Some trading platforms, especially forex platforms, have a built-in trailing stop feature that some new traders may be tempted to use.
This is actually one of the worst ways to track stop loss.
The reason is…
A trailing stop loss on a trading platform usually tracks the stop loss as a fixed point value, track it on every tick.
As explained above, using fixed-point values alone does not help because it does not take into account the current volatility of the market.
But using a trailing stop every tick is even worse.
With this type of trailing stop, the stop loss starts trailing as soon as the trade moves in the positive direction.
Even if the trade is not yet profitable.
Again, that might sound great in theory.
However, the reality is that this type of trailing stop “strangles” the trade so quickly that it usually ends up being stopped with a small loss or missing a big move with only a small gain. .
So avoid this type of trailing stop loss and test the methods in the above list.
Which Trailing Stop Strategy Is Best?
In reality, there is no one trailing stop loss strategy that is perfect for everyone.
The trailing stop method should fit well with your entry and trading personality.
Therefore, the best way to start implementing a trailing stop is to get data on your current trading strategy without a trailing stop.
Knowing these statistics gives us a baseline to compare with strategies using trailing stops.
Test different trailing stop methods on entry, assuming the test is informative.
The data will tell you which trailing stop method is best to use.
final thoughts
Therefore, there are 7 trailing stop loss methods that can increase your average profit per trade by letting the winners run.
Adding a trailing stop can improve returns dramatically.
However, as with all things in trading, always test your trailing stop method extensively before risking real money.
The strategy you use should match the nature of your entry and trading.
Try a few different trailing exits to get some stats and choose the best one.
Also, explore other trailing stop methods not mentioned in this tutorial.
enjoy!