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Since there seemed to be many questions about trailing stop, I ll share something from my trading diary dated 28 Aug 2007

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The idea of trailing stop is similar to that of stop loss, except that in this case, it is used to lock profits instead of cutting losses. Trailing stops also is to be moved from time to time, adjusted to lock more profits as it becomes available to the position taken; whereas, a stop loss should not be adjusted to book in more losses.



The best circumstances for a trailing stop is to allow room for swings but yet set in such a manner that will exit the position once a change in trend has taken place. This is where the difficulty begins.



In a slow moving market, one has all the time in the world (well, figuratively speaking) to adjust the trailing stop to account what was mentioned above. However, in a fast moving, volatile market, the difficulty is compounded by the speed of which decision needs to be made.



Yesterday, I caught the beginning of an uptrend, of which by end of the day would yield 40 ES points; equivalent to USD2,000 per contract. Uptrend paused in mid day, would have yielded about 20 points, equivalent to USD1,000 per contract.



However, I have not mastered the Art of Adjusting Trailing Stop. I moved my stop too quickly by the 3rd candle of a larger time­frame­. The trade was in position for 2 minutes and 38 seconds before I was stopped out with a measly 1 tick profit, equivalent to USD12.50. Had I keep the position open for another 5 minutes, it would churn out a profit of 8 ES point, equivalent to USD400 per contract.



No, this is not a regret post. This is a post mortem to identify the areas for improvement. I ll be adjusting the trailing stop only on and after the 5th candle of the larger time­frame­. This I believe would solve the problem since I have complete confidence in the version of Stage Analysis method, which is the main backbone of my system.



How to adjust the trailing stop to yield optimum results? I have no answer. I believe in the words of Mark Douglas – it depends on how you determine your own worth. In the scenario above, I determined that I was only worth 1 tick!!??? L. Of course, if the market is not allowing profits in the position, then the above statement is not relevant.



The whole idea is that after we identify the major trend, we look for opportunity to enter the trade either in minor pullback or another major breakout in trend. This entry should take into account of what the market wants to do. So, we have identified that statistically speaking, it is probable that our position would be favorable. Thereafter, we adjust the trailing stop accordingly. This is where our determination of self worth comes in.



Look back at the scenario. The entry was made in accordance to a major breakout. I was looking at a potential of 20 ES point by end of the day, though I may not stay awake till then. Nonetheless, the key point is that I moved my trailing stop too quickly, getting stopped out with a measly 1 tick profit.


Therefore, understanding the concept of Trailing Stop is one thing, application is another, while mastery is a complete different story altogether. I ll use the infamous trial-and-error method to suit to my trading system. I ll not be looking at mastery just yet, as Jean Luc Picard (starred by Patrick Stewart) of Star Trek: The Next Generation says, “Don’t try to be great. Let history decide”

Trailing-stops are designed to lock in your profits at the most opportune time. If properly used, they are the tools to excellent profits.

Unfortunately set rules seldom work. You need to change with the circumstances to succeed.

Anything of value takes time to learn and master. In this case, experience and lots of observation are the most effective way.

Cheers! and happy learning.