Should You Use a Trailing Stop Loss?

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#369: Should You Use a Trailing Stop Loss?

In this video:
00:26 – How to manage trades?
01:08 – Don’t move your stop loss to breakeven
01:50 – Disadvantages of a trailing stop
03:17 – Where do I place a stop loss?
04:05 – How I manage a stop loss
06:15 – Try to avoid moving to breakeven and avoid trailing stops
06:40 – Email me if you have any questions about trading the Forex market

Should you trail your stop, or should you move your stop to break even, or should you do something completely different? Let’s talk about that and more, right now.

Hey Forex traders, it’s Andrew Mitchem here at The Forex Trading Coach, with video and podcast number 369.

How to manage trades?

Now, I quite often get emails asking me about how I manage trades, and I’ve had an email come through just today, and it’s from someone who’s saying “Hey Andrew, can you tell me the best way to trail a stop?” and they basically said they want to use trailing stops, and how should they use it? My question back to them is quite simple. It’s how big a stop-loss should you use? And it’s like “well, how long is a piece of string?” It really is a level or a number that no one can tell you what you should do, because in my opinion, you should not use trailing stops.

Don’t move your stop loss to breakeven

I also don’t think you should move your stop to break even either. Because when you think about it, moving a stop to break even doesn’t actually do anything. It might make you feel all warm and fuzzy, and “Well, I can’t lose on this trade,” but from a trading point of view, and if you actually look at your trade’s bigger picture longer term, if you just move your stop to break even, does that actually improve your trading success and your overall profitability?

I highly doubt it does, because when you move your stop to break even, when do you decide to do that? Do you move it when you’re almost at your profit target? Do you move it really soon, and then you get stopped out all the time? How do you decide? And it’s a little bit like a trailing stop.

Disadvantages of a trailing stop

One of the big disadvantages of a trailing stop is that on most platforms, you actually have to have your computer on, in order for that trailing stop to work, certainly on the MetaTrader platform you do. You can’t just put a trailing stop in and turn your computer off, because the trailing stop actually sits on your computer, rather than on the broker’s service, unlike a fixed stop or fixed profit target.

And then it comes down to the point of how big is your trailing stop, and when do you introduce that trailing stop? Now, an example would be the Euro British Pound, doesn’t move very much, but if you’re trading something like the Euro New Zealand or the Pound New Zealand dollar, and then the same stop loss that you use on your Euro-Pound would be stopped at all the time on your bigger moving pair. And then of course, it comes down to another thing: what timeframe charts are you trading, and how big is your stop-loss anyway. So it all becomes quite a bit… It becomes very messy and it doesn’t become something that you can do very well with consistency. It starts to become emotional and a bit of guesswork on there. And I don’t like emotions and guesswork in trading. I like to know facts on like to know actuals. And I think that’s where people who play around with their stop-losses too much actually come on stuck. They actually think they’re doing a good thing, but in reality, they’re probably not really doing themselves any trading favours.

Where do I place a stop loss?

So how do I approach this? Well, first of all, from my own point of view, when I put a stop-loss in, I put it there for a reason. I know that it’s generally below a round number if I’m buying or above a round number if I’m selling, or support or resistance levels, but it’s there for a reason. I also know that if I do get stopped at, at the full stop-loss, I’ve lost X amount of percent of my account. Generally for me, a quarter or half of 1%. It’s a very small risk per trade. So I have all that pre-calculated.

I also know that from my own trading point of view, my reward-to-risk is very high on trades. So, when I have a profitable trade, it more than outweighs several losing trades. However, if I were to go and change a stop-loss or edited, it would be for a reason.

How I manage a stop loss

And I would do one or two things. I would either close part of the trade because that’s effectively locking in some profit anyway, assuming that the trades in good profit, but I would only do that if I saw a reason to stop or to get out of the trade, or I’m starting to doubt the trade. But at this point, I’m assuming it’s still in good profit, but it’s not like the full profit target. So I could look at closing at part of that trade, if I wanted to.

The other thing I could do, if I only wanted to move the stop would be, I would move the stop-loss for a top technical reason, not just some arbitrary figure and put it 20 pips away or 50 pips away. I would, let’s say we’re buying a currency pair and it’s not gotten to the full profit target yet, but we’re in really good profit. What I would do is I would actually move my fixed stop from its original position. I would move it up to, let’s say it’s still protected by a round number or a previous low or pivot point or something like that. So I’m actually moving it for a reason, and I’m moving it to another safety level. Let’s say our trade had already been up and had come back down, it’s gone up again, and now it’s coming back a little bit more. Now that last banks, providing I put that stop-loss below that last banks, it’s quite likely if my trade in the first place is a good trade, it’s still going to get there in the end. But it also means that that last bounce probably is now a new support level.

So putting my stop loss below that level is another safety area. It means I’ve guaranteed to lock in some profit, even if it comes and stops me out, but I’ve actually guaranteed some profit out of the trade. Far better to do that than just go “I’m up X number of dollars or pips, whatever it might be, I’m just going to put my stop at a breakeven,” because your entry point at breakeven has no technical relevance, really on most trading systems. And so moving your stop-loss to a technical level for a reason is a good point and partially closing some of your trade. And even at that point, then moving your stop-loss is another good area and a good way to manage your trades.

Try to avoid moving to breakeven and avoid trailing stops

So I hope that helps try to get away from moving to breakeven, just because that’s what some website told you to do. Try to get away from trading stops because in all honesty, they really do have almost no significance at all and no technical sort of actual ability to help you improve your trades. No statistical advantage whatsoever.

Email me if you have any questions about trading the Forex market

So I hope that helps any questions that you have about practical trading. Just come through to me, Andrew at theforextradingcoach.com. Have a look on the website, theforextradingcoach.com. And I’ll see you this time next week with another video and podcast. Bye for now.

Episode Title: #369: Should You Use a Trailing Stop Loss?

 


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