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Posted on Nov 11, 2018 at 06:32 PM
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MONEY MANAGEMENT SERIES #1: WHAT’S THE BEST WAY TO TRAIL YOUR STOP LOSS?

Have you ever sought for the best way to limit losses and to lock in profits on your trades? Stop giving all your profit to the market! Learn how to move your trades into profit and lock them in now.

In continuation of our weekly Q&A series, we will now enter a new phase of our learning where you get to know the best way to trail your stop loss. 

This week’s question comes from Desmond, who asks: “What’s the best way to manage & trail my stop loss when trading Forex?”

 One of the hardest parts of trading is knowing when to trail your stop loss. “Trail it too soon and you get stopped out prematurely”.

“Trail it too late and you take an unnecessary loss”.

Lucky for you, this series will to break it all down for you and by the time you finish reading, you’ll know your options, plus the pros and cons of each to make better & profitable trading decisions.

I’ll also share the process I use for deciding when and where to trail my stop loss.

Last but not least, I’ll give my thoughts on the notorious breakeven stop loss so rest assured, you are in for a treat!

This series will be put out once every week so be sure to click here to get notified as soon as the next series is out so you can catch the full scoop.

 WHAT ARE YOUR OPTIONS?

You will agree that when facing any decision in life, it’s a good idea to take a step back and look at your options. It helps  add structure to the decision and often presents the best choice with little effort.

As traders, we have three options when it comes to using and trailing a stop loss.

  1. Use one but don’t move it
  2. Use one and trail it
  3. Don’t use one at all

Although number three is an option, it isn’t one I’d ever use or recommend.

However, we’re including it because we receive far too many emails each week from traders who’ve lost a substantial sum of money by not using a stop loss at all.

All I can say is, don’t make that mistake! Not only does a stop loss order help protect your capital, but it also allows you to size your position properly.

So that leaves us with numbers one and two from the list above.

While option #1 is certainly better than option #2, I can’t think of a recent situation where I used a stop loss but didn’t trail it once the market started moving in my favor.

However, timing is key. Move it too soon and you get stopped out before the trade ever had a chance. Move it too late and you’ll take an unnecessary loss.

So now that we know our options, let’s discuss some specifics.

TRAILING STOP LOSS IN 3 QUICK and EFFECTIVE STEPS

I often talk about the process of good trading. Now the truth is, it’s a combination of several processes working together. One of those processes deals with using and trailing a stop loss.

The general idea behind the process below is that by following the market’s movements, you’ll be able to decide when it’s time to move your stop loss. This makes sense because it’s precisely the same as placing your stop on the initial setup.

In quick easy steps, here are the 3 steps I follow when trailing my stop loss.

Step 1. Wait for the break

If you’ve followed our trade signals & setups for a while now, you’ll know that we mostly use the 1-Hour time frame. Since we day-trade with London/European Open and then ride into the New York Open charts, it means that each 24-hour session for us closes at 10 pm.

Not only is this important when scanning for buy and sell signals, but it’s also essential when trailing your stop.

Provided you’re trading a market that has momentum, you’ll want to wait for the market to close above or below the next key level before getting too aggressive with moving your stop loss.

Take the EURUSD daily chart below as an example.

Sample 1

 While the market was somewhat sideways prior to forming the bearish inside bar above, the intermediate trend was pointed lower.

Note that when trading an inside bar, your initial stop loss should go above or below the long wick. See the chart above.

Now, when trailing your stop, it’s important to wait for the market to present the opportunity. And if you’re a start-of-day trader like me, that requires waiting for the day to open below or above the next key support or resistance level.

The daily close below the next key level confirmed the break. That completes step one of our three-step process.

STEP 2. WAIT FOR THE RETEST

Notice there’s a lot of waiting here. That is deliberate.

When you’re trading tight-entry strategies on the hourly time frame, it sometimes takes hours before you can safely begin to trail your stop loss order.

Again, the goal is not to break even as soon as possible. I apologize in advance if this sounds offensive, but not moving your stop when you’re in profit by 15 pips is a rookie mistake.

If you do that on the higher time frames, which I don’t fancy that much, I can just about guarantee you’ll get stopped out too soon as you’ll require a much higher stop-loss pip value.

The purpose of waiting for the retest is two-fold…

It helps to confirm the break in step one with an opportunity for re-entry

It gives you a starting point to begin trailing your stop loss

Let’s take another look at our EURUSD example.

Notice how after I entered short, I waited for the pair to close the day below the next key level. I then waited a few more hours for the market to retest the broken support level as new resistance.

trailing_stop_loss_1

You could also trail your stop above the first bearish candle following our pin bar. That’s a perfectly viable option. However, it does leave your stop order exposed which can be a drawback, particularly in volatile market conditions.

I’ll admit that this is a relatively conservative approach. You don’t necessarily have to wait for a break and retest to trail your stop, but it will give you the best chance of allowing the market to work for you

Do you use stop loss at all? Do you use trailing stops? What's your take on this topic? Do well to leave a comment in the section below as I'll be on standby to respond to everyone of them!

The next series is up! Click here to view the remaining steps now! 


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Previous Comments

  • FRANK
      Nov 23, 2018 at 02:07 PM

    What if I am too busy and want to use the automatic trailing stop loss, what the best point/pips to use?

    View Replies Reply
  • AWA AGWU
      Nov 28, 2018 at 03:27 AM

    I wished there is a video tutorial on this for more clarification.

    View Replies Reply

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