To Trailing Stop or Not To Trailing Stop....

Ramble... Ramble...
Looks Bullish to me. Better have a closer look at this one.

Yeah. Could be a 100p move coming here and it has decent support 30p below.
Buy 1 .
SL = Previous Support.
TP/TS = Once the trade has aquired 50% of my Projected Move, I will risk 20% of the Maximum Profit of the Trade.

eg.
Up 50p = Risk 10p for 40p Prft.
Up 80p = Risk 16p for 64p Prft.
Up 100p = Risk 20p for 80p Prft.
Up 135p = Risk 27p for 108p Prft.
Up 200p = Risk 40p for 160p Prft.

Notice that, although my Pip Risk is Increasing;
I am still In The Trade Beyond My Original Expectations.
The Trade now has room to breath.
I may have caught a Durable Trend.

Moving/tightening the stops manually is becoming a hobby here. It pretty rocks.

Hail to the Monarch!

One short post that better illustrates S/L strategy than entire chapters found elsewhere.. Posts like these are truly the nuts and bolts of the forum.
Thank You Bemac.

Definitely some mixed opinions here....

Bemac (or anyone else),

Would you be so kind as to reword your post above? I am having difficulty in understanding your example.

Thank you,
andersenws

In the end it comes down to whether using a trailing stop improves or diminishes on your system or method's performance. Does it help you control risk, increase profits, decrease losses etc. And to figure that out you have to test, observe, and evaluate. From the testing I've done I haven't found that using a trailing stop adds to my systems' performance so I haven't used them.

I may be wrong as it took me a couple of goes to grasp it, so

after a 50 pip gain set stop 10 pips below current price ie give back 10 but gaining 40 on the trade
....
after a 200 pip gain set stop 40 pips below current price ie give back 40 but gaining 160 on the trade

Sorry Guys, I meant to respond to this earlier. You got it Peter.

Before I Enter any Trade, I have both a Pre-determined Target and Risk.
For the sake of simple Math,
Projected Profit in Pips = 100p
Projected Risk in Pips = -30p

In this scenario I would place a Hard Stop Loss @ Entry - 30p

Once the trade has aquired 50% of my Projected Profit {50p}, I will move my SL to risk 20% of those 50p.
50 x 20% = 10. Thereby Locking in a 40p Profit.

And continue to Trail my SL @ Max Trade Profit Pips - (Max Trade Profit Pips x 20%)

I will continue to do this even through my Original Projected Profit in Pips Target of 100p

Does that help?

eg.
Up 50p = Risk 10p Locking in 40p Prft.
Up 80p = Risk 16p Locking in 64p Prft.
Up 100p = Risk 20p Locking in 80p Prft.
Up 135p = Risk 27p Locking in 108p Prft.
Up 200p = Risk 40p Locking in 160p Prft.

Notice that, although my Pip Risk is Increasing;
I am still In The Trade Beyond My Original Expectations.
The Trade now has room to breath.
I may have caught a Durable Trend.

Great strategy Bemac. Thanks for the information.

Here is what I believe is the correct theoretical answer. What is workably practical may, or may not, be different.

Exit involves balancing the following considerations:

1. Maximizing overall profitability
If we think carefully, this should be based entirely on analysis (TA, FA, statistics) of what is going to happen henceforth. The market doesn’t care whether we’re entering or exiting (apart from stoploss raids, possibly), and what has happened thus far in the trade – whether we are 50 pips in profit, or 50 pips in loss – is irrelevant. If we had a crystal ball, and knew that price was going to move another 20 pips in our favor, would we exit now? Of course not. The nearest thing we have to a crystal ball is analysis. We may be able to determine, in terms of vague probability, whether a rise or fall from the current point is more likely. If the next move is more likely to be in our favor than not, then we should stay in the trade; if not, then we should exit. If our analysis suggests that probability is indeterminate, then we have a 50/50 chance of gain/loss, should we choose to continue.

From this perspective (however, see point 2 for a competing one), treating each trade as a distinct entity serves no useful purpose. Whether we make 10 pips now on the current trade, or 10 pips on a later one, has the same effect on eventual bottom line: 10 pips is 10 pips.

To summarize, what has happened thus far in the current trade is irrelevant – we can not reverse history – it is what will happen henceforth that will either add to, or reduce, our eventual annual bottom line. In this respect, exit is simply the reverse of entry (plenty of discussion on that topic here: http://www.forexfactory.com/showthread.php?t=38152).

Post #2 by Niceguy777 in this thread
http://www.forexfactory.com/showthread.php?t=7623
conveys the same idea – exits based on TA realistically improve the probabilistic outcome of the trade; exits based on arbitrary TPs or an arbitrarily selected trail value on a SL, do not.

Viewed from this perspective, the idea that we should close when within 5 pips of out TP, to protect the 50 pips we’ve already made (see post #20 by Enroth), is incorrect. All things being equal (assuming approximately random price movement) we have 10 times more chance of a 5 pip movement occurring, from any given point, than a 50 pip one.

2. Risk management, margin and sizing
Point 1 would, I believe, be mathematically irrefutable, if we had an infinite amount of capital. The latter being the case, we would never need protective stops, and the optimum position size (given a positive expectancy method) would always be “as much as possible”. But of course the reality is that our account size is finite. Hence there is a need to close trades out, at the very least, well before our account is in danger of a margin call. Asymmetric leverage means that the deeper our balance plunges, the disproportionately greater, percentage-wise, our wins need to be, to recover to break-even.

This also necessitates taking – or locking in – profit on the current trades, where possible, to offset potential losses on future trades.

Moreover, given that our analysis yields vague probabilities, rather than certainties, hence we must preserve capital long enough to allow whatever "edge" we might have, to prevail. The smaller the edge, the greater the need to be conservative.

Conversely, we must close out high enough number of trades at sufficient profit, whether by TP or trailing SL, if our account (in terms of gains actually realized) is ever going to grow, and to free up margin for use in future trades, and - if we use fixed fractional sizing - allow the recycled capital to compound, allowing exponential growth.

Initial risk on an individual trade is determined by two factors: position size, and distance of SL from entry. If we can manage risk through small position size, then that leaves us more scope to focus on the “maximize profit” considerations in #1.

3. Income consistency
This applies largely if trading is our primary form of income. Obviously we must realize gains periodically to provide income to pay our bills. Realizing gains means taking profit, and creates a necessity that competes with, and in that sense creates the need to make sacrifices in the context of, the other considerations. (This additional stress is a major reason why I believe I will never allow myself to “trade for a living”).

4. Psychology
Emotionally, we need to do what we feel comfortable with. In other words, we must take whatever steps are necessary to ensure that we don’t reach the point where a succession of losses might cause instability or irrationality in our thinking, with regard to future trades. Better to take profit now, than have another loss set us on a path of revenge trading using martingale position sizing! There may be other ways of dealing with the emotional aspects (e.g. playing only with money that we can afford to lose), to reduce their impact on our trading decisions; thus removing #4 as a competing consideration.

Referring once again to Enroth's comment in post #20, considerations #2, #3, #4 can all be used to vindicate the taking of profit 5 pips before the TP is reached, rather than risk 50 pips already made.


TP vs trailing SL
In addition to the above, how we exit will determine the balance between win rate and average win size. My research tends to suggest that using TPs will improve win rate (profit is getting safely banked, without giving any back), but at the expense of win size (pips get left on the table, during long trends). The quicker profit is taken, the greater this effect. Using trailing SLs achieves the reverse: low win rate (too much profit given back, to the point that some winners become losers) but high win size (those that are allowed to continue catch whatever long trends occur). The closer price movement gets to being random, the less relevant exit method becomes.

Of course it is possible to compromise, e.g. take a partial profit at a suitable point, and move SL to breakeven, then trail this to allow the reminder to ride, in the hope of catching a long move.

Hence it makes sense to use an exit method that suits our system type, philosophy and lifestyle. If we are trend-followers, then it makes sense to allow much of the profit to ride as long as possible, hence a trailing SL fits the bill. If we are picking tops and bottoms across a range, then taking profit early might be a better solution. If our system involves trading a breakout (e.g. from a news announcement), then it might make sense to take profit quickly once momentum subsides, following the initial spike.

Re philosophy and lifestyle, I refer back to considerations #3 and #4. It depends on an individual’s appetite for risk, financial goals, and need for consistent income. One must take profit often enough to achieve the latter.

Finally I would suggest that, because opinion seems to be fairly equally divided between TP and tailing SL, it would seem that both can be made to work, under the right set of circumstances. Trying to become too precise might well amount to curve fitting, although there does seem to be a pattern in Philmcgrew’s research here (post #8 in this thread: http://www.forexfactory.com/showthread.php?t=12273). Dopey’s post (#2 in this same thread) makes some excellent points, IMHO.

David

Hey gang,

Let me describe my newest idea. It goes against my philosophy a little, but darned if it isn't effective.

Here is the rule:

If the price reaches 70% of my target, I double my SL.

THAT'S RIGHT. I don't trail it.... instead I widen it. The rational is that if the price has gone 70%, the momentum is with the trade. So it would take a heck of a reversal to stop me out w/ a double SL.

Here is the benefit of this strategy: The initial risk is very small with a tight stop. If the trade goes against me early, my loss is small. However, if the trade is working, it builds enough confidence at 70% to double my risk.

Suppose my risk is 2% on a trade, and it goes 70%.... I effectively risk 4% at 70%.

Ahah, you might ask, what about when you have pyramided into a position? Well, you only apply this logic to a single trade, because if there is a reversal, you will only have one stop doubled against you.

Well this thread got buried quickly, and I'm resurrecting it one more time to hear what you have to say.

I am adamently against trading without stops.... so this technique is a happy medium.

The method described above will give your trades some extra breathing room to complete the take profit. It is rather amusing that all the "seasoned" traders are using trailing stops, while I widen mine.

This can be good--I see the rationale. A variation of this theme is to widen your stop a little in increments as the trade goes in your favor. This tactic can keep you in the trade longer,giving you more and more breathing room and keeping you in the money as well.
By widening a little I mean using a fixed percentage for your stop.
Just for a number, try 25%
+100 pip=25 pip stop loss= 75 pip gain if stopped
+140 pip =35 pt stop loss =105 pip gain if stopped
+ 200 pip=50 pip stop loss=150 gain if stopped.
Though you are risking more pips you are gettin further into the money as well. This could keep you in a trend for a long time.
Credit for this goes to Bemac.

I dont use TS except when i cannot look at the market for some time and dont want to exit a position because it seems OK.

Instead i use moving SL based on the BrainTrend SL system which usually keeps you in when the market is trending

After burning myself a couple of times and performing 1000s of calculations...
I am not using SL.

There are 2 problems with the trend.
1. You do not know when will it end.
2. You do not know what is the size/extent of the trend will be.

Large trends (I am a long term player) happens rarely, maybe once a year... So I just set my targets and NO SL based on my system. Some do not have targets and let the boys run. Sounds crazy? Believe you need to leave breathe the market.

A little cheat I am using a so called catastrophic SL of say 500-600 pips maybe 800 but that is "just in case" if the market behind my back decides to do a major turnover.

This line of thinking assumes that you aren't listening to what the market is telling you after the trade is entered. Also, no one I know picks a target because "that's what they are willing to take". They pick it because at the time of entry that is what seems most likely. If however, later in the trade, the market doesn't provide supporting evidence that that is still the best target, then you have to reevaluate (e.g. by moving a stop up or a target down or both). I have a hard time believing that you are so sure of every probabilistic path the market can take on the way to your target that you can just say "well, why not just set your target differently?". I'm willing to take 1 pip of profit but that doesn't mean I'm going to start setting all my targets to 1 pip. That said, I always think that a stop should be placed no closer than the point that your current evaluation tells you that the trade is no longer following the plan. In other words, just setting it some arbitrary distance isn't ideal. It needs to make sense in the context of recent activity.

Great thread.

I tihnk the timescale, as well as the strategy is all important. Thinking of Black Swans, the longer you're holding a trade for, the less you can predict where it's going to go.

Ergo, the longer the trade, the higher the chance a trailing stop will be beneficial, because it'll keep you in to those big moves every now and then, and in particular, those big moves that you can't predict from the outset.