Trailing Stops

Trailing stops are dynamic stop orders that follow price in an attempt to lock in profits, while allowing a position to capture additional profits during a price trend. A trailing stop will move up in a long trade to follow the rising market and will move down in a short trade to follow a falling market. The trailing stop can be based on a certain dollar amount: for example, a trailing stop can follow price and allow the trade to fall back $100 from its most profitable point before it is closed out. A trailing stop can also be based on percentage: the stop level adjusts to a specified percentage below the market price (for long trades) or above the market (for short trades).

 

This chart of McGraw Hill (MHP) from September 3, 2009 shows a downtrend with a trailing stop applied. I used a volatility based stop to set the levels for my trailing stops. This was a beautiful downtrend that allowed the trailing stops to work very effectively. The trailing stop levels are shown here as small red dots above the price bars. The blue dots signify where the trailing stop is touched, and therefore, the trade closed.

 

McGraw Hill on September 3, 2009. A volatility based stop was used to lock in profits along the nice downtrend. I have a paintbar study applied to the price bars indicating that volatility shows downwards pressure.

 

Next, let's look at an example where the trend is not as enduring and see how trailing stop levels can still be used successfully.

 

 E-mini Russell on September 15, 2009. A trailing stop was used to lock in profits on both upward and downward moves. I have a paintbar study applied to the price bars indicating where volatility shows upward momentum(green bars) or downward  pressure (red bars).

  

In this chart example, we don't have the long-lasting trend as seen in the MHP chart. Instead we have a non-trending market where we are still able to effectively use trailing stops. The green dots show my trailing stop for a long position; the red dots indicate the trailing stop level during a short position.

 

I find a useful method of using trailing stops is to close out the first part of a trade with a profit target and allowing the remaining shares/contracts to exit using the trailing stop levels. In this manner, you can allow the trade significant movement during trending markets while not risking the entire position.

Comments

[Mayur Shah]

Can you use this study on intra day charts?

[MBT Sandal]

good