Over the past couple of weeks, I’ve been going over a wide variety of trailing stop strategies and trade exit approaches. These methods help you trail your stop to allow price action to dictate when you get out of the trade. In some cases, using a trailing stop can allow you to take advantage of trending markets and profit on a larger portion of the move. Today I want to go over 2 ways to exit the trade that are not “technically” a trailing stop at all. I’m talking about the Equity Stop and Percentage Stop.

But first, I want to address a couple of comments I got on previous posts…

Programming Trailing Stop Strategies?

I was asked about the ability to program these trailing stops into an EA. This could be an expert advisor specifically used to apply the trailing stop strategy after the trade is live. Or this could be part of the overall trading strategy programmed into a complete auto trading robot. Since the rules are pretty straightforward, this should not be a problem at all.

If you’ve read some of my previous posts, you already know I am a big fan of creating expert advisors to take care of trade management after the trade is live. The hardest part of trading, in my opinion, is managing the trade when real money is on the line. Automating this process with one of the trailing stop approaches I’ve gone over is the easiest way to take the stress out of trading and sticking to your rules.

Linear And Non-Linear Trailing Stops?

If I understand the question correctly, I got a question about stops that follow price in static increments (linear), compared to stops that take volatility into consideration and move the stop up quicker if the speed of price movement increases (non-linear). Here are some thoughts.

None of the trailing stop techniques I’ve described take into account the speed of the candle while it is forming. In truth, this is too complex for me to think about because I describe trailing stop methods you can use manually (or have programmed). I don’t know how I would take into consideration the speed of a candle while watching the charts, so I don’t specifically have a non-linear strategy for when the candle is live.

That being said, there are various trailing stop methods I go over that do take into consideration the volatility of the market on candle close. Most of the trailing stop methods I use are calculated on the close of each candle. Here are some examples…

Bullish Bar – Bearish Bar Trailing Stop:

Using this method, you move the stop the same number of pips between open and close or the candle when price moves in your favor. (Bullish bars for buy trades and Bearish bars for sell trades). This does take market volatility into consideration because the amount you move the stop is not static, but calculated by the size of the previous bars move. Bigger the move, bigger the stop loss move.

ATR Trailing Stop:

Using this system, you use the Average True Range indicator to determine the number of pips to move your stop. This can either be the ATR value itself, or the ATR value multiplied by 1.25, 1.5, 2, etc. Again, market volatility is taken into consideration.

If you look back at the trailing stop strategies I’ve gone over, a lot of them trail price action taking market volatility into consideration. They are not just moving the stop a static number of pips. And remember, using a trailing stop is always going to follow price action and give up a little profits when the trade is closed out. The trick is to follow price to lock in as much profits as possiible, without following too closely and getting stopped out too early.

OK, let’s go over 2 trade exit approaches, that are not really trailing stops….

Equity Stop

This strategy is for traders who have many trades on at any one time. It is really not that useful if you only have one trade on at a time. So, imagine you have a daily profit target of $500 and 5 trades running. You would set the Equity Stop to close all trades once you reach the $500 mark.

Even if you have 3 trades winning and 2 losing at the time you reach $500, all the trades would be closed. This way you guarantee you hit your daily price target. Using the Equity stop, you can set up a daily target and exit all trades when the dollar amount is hit, regardless of the state of the trades at the time.

Percentage Stop

This is similar to the Equity Stop, but using percentages. If you have a trade plan with a percentage goal, you can use a Percentage Stop to exit all trades once this percentage has been reached. Again, all trades are closed when your percentage gain is reached, regardless of the status of the trades.

Some traders maintain the trailing stop as a percentage of the price.

For example, if you have a goal of 1.5% per day, you would set the Percentage Stop to exit all trades once your trades reached 1.5% of the balance, regardless of the state of all the trades.

These strategies are really not trailing stop approaches. But I thought this was a good place to put them as you are using something other than price targets to exit the trade. Both strategies should be able to be programmed into an EA.

This pretty much ends the series on trailing stops. If you have something you want me to talk about, or something you think I missed, please leave a comment below.

Over the past couple of weeks we have been going over different trailing stop systems. Using a trailing stop allows you to let price action dicatate when to get out of the trade. In non trending markets, using a trailing stop can reduce your risk or get you out of the trade with a small gain.

In trending markets, the trailing stop can safely keep you in the trade longer for larger gains.

Today I want to go over two trailing stop systems, the Bullish / Bearish Bar Trailing Stop and the Round Number Trailing Stop.

Bullish / Bearish Bar Trailing Stop

This trailing stop method is interesting because it not only moves the stop in your favor, but uses market volatility to determine how much to move the stop. This is beneficial because when big moves happen in the market, a larger portion of the winnings is locked in. In times of lower volatility, the stop does not move as much, or at all, which possibly keeps you in the trade longer.

For a buy order, the stop loss is only moved if the next bar upon close is a bullish bar. The stop is adjusted the same number of pips as difference between the open and close of the bar. For example, if the difference between the open and close is 32 pips up, you would move the stop loss 32 pips up. If the next bar is bearish, the stop loss is not moved at all.

Here is an example of a buy trade…

As you can see in the photo, the stop loss was moved 4 times, corresponding to the 4 bullish bars that occured after the trade was placed. Each time the stop was moved, it moved the same number of pips as the number of pips for the bullish bar from open to close. This trade resulted in locking in 95 pips before being stopped out.

For a sell order, the stop loss is only moved if the next bar upon close is a bearish bar. The stop is adjusted the same number of pips as the difference between the open and close of the bar. For example, if the difference between the open and close is 45 pips down, you would move the stop loss 45 pips down. If the next bar is bullish, the stop loss remains in the original position.

Here is an example of a sell trade…

As you can see in the photo, the stop was moved 4 times. Each time there was a bearish bar, the new stop location was calculated from the bars open to close pip numbers. This trade resulted in locking in 166 pips before being stopped out.

Round Number Trailing Stop

Round numbers are price levels that end in 50 and 00. Remember, price action is determined by the action of traders, which are human beings. Levels that end in 50 or 00 have a strong psychological effect. For this reason, these levels make for strong support and resistance levels. They also make for good triggers to move your stop loss.

There are indicators on the Internet that mark these round number levels. Instead of the grid normally found on the charts, you would see lines at the 50 and 100 levels. These are important psychological levels and you’ll see price react to these levels quite often.

If you are on the lower time frames (anything below H4), I recommend using the 50 levels as your stop loss trigger. If you are trading the H4 or higher, it is probably a better idea to only use the 00 levels. Basically, on the lower time frames you will be trailing your stop by 50 pips, and on the higher time frames by 100 pips.

Here is how the round number trailing stop works…

When a candle crosses a round number level and CLOSES on the other side, move the stop to the previous round number level. Since the round number levels are good support and resistance levels, it is a good idea to move the stop to just below (for a buy trade) or just above (for a sell trade) of the 50 or 00 level.

Here is an example…

As you can see in the photo, the trailing stop was moved 6 times and placed slightly below the round number line. I used a round number indicator I found on the web for this example. I set the round numbers to 100 to only show levels ending in 00 since this is a daily chart. Each time a candle closed above a 00 line, I moved the stop to slightly below the previous 00 line. This resulted in 545 pips being locked in before being stopped out.

In the next installment, I want to go over two more strategies. These are not really “trailing” stop systems, but two ways to exit trades once triggered that don’t hit the stop loss or take profit levels. In the meantime, leave a comment with your thoughts on my trailing stop ideas.

Today I want to continue with our discussion of trailing stop strategies. Remember, trailing stops are ways to reduce and eliminate risk once the trade goes in your favor. Instead of giving profits back to the market, you can lock in profits as you look for bigger gains. In this installment, I want to go over the Moving Average and Parabolic SAR trailing stop strategies.

Moving Average Trailing Stop

The moving average is a popular indicator used to show the average value of price over a given time period. Moving averages are generally used to determine trend direction and momentum. For example, if price is above a 50 Moving average you can consider the market in an up trend. If price is below the 50 moving average, you can consider the market in a down trend. Moving averages can also be used as a trailing stop, which is what we are going to take a look at.

There are two ways to use moving averages to exit a trade. The first is by using the moving average location to trail your stop. The second is to use a cross and close of a candle on the other side of the moving average as a signal to exit the trade.

Using Moving Averages As A Trailing Stop

In this scenario, you use the moving average position to determine where to trail your stop. As the trade progresses and the moving average position changes, you trail the stop at each candle close. In this way, the stop loss follows price and the trade is exited when price reverses enough to take out the stop loss.

Here is an example using a Simple Moving Average set to 13.

As you can see in the picture, the orange line is the moving average. In this sell trade, as the trade progresses, you would move the stop according to where the moving average is at the close of the candle. The higher the moving average value, the more room you give price action. The lower the moving average value, the closer to price action you will be trailing your stop.

Using Moving Averages To Close A Trade

This is a variation of using the moving average to exit the trade. Instead of following price using the moving average after each candle close, you only exit the trade after a candle breaks the moving average line and closes on the opposite side. This can potentially keep you from being stopped out early by random price action which can happen if you are trailing price too closely.

Here is an example using the Simple Moving Average settings of Period 3 and Shift 3. I like this 3/3 moving average for this strategy because it keeps you close to price action, but allows for nice profits since you need a break and close of the candle to exit the trade.

As you can see in the photo, price pierced the 3/3 moving average several times in the beginning of the trade. But you would not have exited the trade because price did not cross and CLOSE on the other side of the moving average. At the bottom, when price crosses and closes on the other side of the moving average, you would close the trade.

Parabolic SAR Trailing Stop

The Parabolic SAR (Stop and Reverse) is an indicator that can help find potential reversal points in the market. When price is tending up, the SAR dot is placed below price. When price is trending down, the SAR dot is placed above price. At the close of a candle, the SAR vaule is calculated for the next candle. This makes using the SAR dots good for a trailing stop.

Here is an example using the defaut settings of Step 0.02 and Maximum 0.2.

As you can see in the photo, there is a buy order. Each time a new Parabolic SAR dot appears below price, the stop loss was moved. This resulted in 15 moves of the stop loss before finally being stopped out with 300 pips profit.

Another way to use the Parabolic SAR indicator to exit trades is to simply exit the trade when you get an opposite Parabolic SAR dot. So, in the example above, you would exit the trade when the dot switched from being below price to being above price.

In the next post, I want to go over another couple of trailing stop strategies. If you have any trailing stop methods that I have not gone over that you want me to comment on, leave a comment below.

We’ve been having a discussion about trailing stops over the past couple of posts. I wanted to continue that discussion by going over a couple more trailing stop techniques. Today I want to go over the X Candle High / X Candle Low and Average True Range trailing stop techniques.

Trailing stops use price action to determine when to exit the market.

The purpose of moving the stop is to reduce risk, eliminate risk and lock in profits.

Let’s go over the specific techniques.

X Candle High / X Candle Low Trailing Stop Technique

This technique uses a set amount of closed candles in the direction of the trade to determine where to move the stop loss.

A good number of candles for this technique is 2 or 3. The more candles you use, the more room you give the market to move. The lower number of candles you use, the more closely you are following price action. For this example, let’s use 3 candles.

For a BUY trade, you use the lowest low of the past 3 closed candles as the area to move your stop. In a SELL trade, you use the highest high of the past 3 closed candles as the area to move the stop. Whenever a candle closes there is the potential to move the stop. Only move the stop in the direction of the trade.

Here is an example of a BUY trade…

As you can see in the photo, you look at the last 3 closed candles and place your stop at the lowest low. Every time the lowest low of the last 3 candles goes in your favor, you move the stop to lock in more profits. In this example, the stop was moved 11 times before finally being stopped out with 349 pips.

Here is an example of a sell trade..

As you can see in the photo, you look at the last 3 closed candles and move the stop to the highest high. The stop loss was moved 7 times and locked in 267 pips of profit. Since the stop loss has not been hit yet, you would continue moving the stop in this fashion until the stop is hit.

Average True Range Trailing Stop

The Average True Range (ATR) indicator measures the volatility of the currency pair. If the degree of price volatility is high you will get a higher number. On the other hand, if there is not a large degree of price movement you will get a lower number. Many traders like to use the Average True Range to determine stop loss size, or how close to trail the stop.

The theory is, if you are in a volatile market, you’ll need a larger stop loss to keep from getting stopped out by random price movement. If the market is not volatile, you can get away with using a tighter stop. Traders use the average true range as is, or multiply the average true range by 1.25, 1.5, 2 or some other number.

The Average True Range trailing stop strategy is just like the X Pip strategy I talked about in the previous post. Once price goes in your favor, you move the stop based on the close of the candle. In this case, we use the average true range value, or a number based on the average true range multiplied by 1.25, 1.5, 2 or some other number. Every time another candle closes, there is a potential to move the stop loss if that means moving your stop in your favor.

Here is a photo of the Average True Range…

The Average True Range indicator is the blue line at the bottom. To find the value, put your cross-hairs on the line and look to the right to find the value. This is the value you use to calculate the trailing stop loss value. Ever time there is a closed candle, find the ATR value and figure out how close you want to trail the stop. If the value moves the stop in your favor, place the stop at that value.

Next time I’ll go over a couple more trailing stop techniques. In the meantime, if you have a favorite trailing stop method, please leave a comment below.