TRAILING STOP: EFFECTIVE RISK MANAGEMENT TOOL AND 6 PRACTICAL TRADING STRATEGIES

Trailing Stop Issue Resolution

When trading, investors often face difficult situations: should they take profits immediately after gaining a profit or hold the position? Or when trading is at a loss, should they cut losses or wait for a recovery? Emotions often influence decisions more than logic, leading to avoidable mistakes.

The Trailing Stop order is designed to address these issues by automating position management. Instead of constantly monitoring and making impulsive decisions, you can set up a mechanism in advance to protect profits.

What Is a Trailing Stop?

A Trailing Stop is a special type of stop order that allows you to set a stop-loss/take-profit level that automatically adjusts according to the market price. Instead of fixed at a certain price, this level will “follow” (trailing) the highest or lowest price during the trading process.

The distance between the current price and the Trailing Stop can be set in two ways:

• Absolute: a fixed number of pips (for example: 10 pips, 20 pips)
• Relative: a percentage (for example: 10%, 5%)

This order works as follows: if the price moves in your favor, the Trailing Stop level will automatically trail. But once the price reverses beyond the set distance, the order will automatically execute and close the trade.

How Trailing Stop Works Through Real Examples

Situation 1: Absolute Value Trailing Stop

Suppose you open a Long position on the USDJPY pair at 107.852 with a Trailing Stop 10 pips. At this point, the stop-loss is set at 107.842.

• The next day, the price rises 50 pips to 107.902. The Trailing Stop also automatically moves up to 107.892 (maintaining the 10 pips distance).
• On the third day, the price drops to 107.900 but the Trailing Stop remains at 107.892 (not moving back).
• When the market hits a new high at 107.922, the Trailing Stop increases to 107.912.
• Finally, when the price reverses and hits 107.912, the order is triggered, and you take profit with a 60 pips gain.

Key point: The Trailing Stop level only increases when a new higher high is made but never moves backward.

Situation 2: Percentage-Based Trailing Stop

You predict USDJPY will decline, so you enter a Short position at 126.332 with a Trailing Stop 10%. However, the market moves against your prediction, rising to 139.219 (more than 10%).

The Trailing Stop will execute as soon as the price exceeds the 10% stop-loss level, resulting in an equivalent loss. In this case, the Trailing Stop functions like a regular Stop Loss order.

Important Parameters for Setting

Choosing the right Trailing Stop level is key to success. Too tight a level will be triggered by normal market fluctuations, causing you to exit too early. Too wide a level exposes you to unnecessary large losses.

Balance principle:

• In highly volatile markets: set a wider Trailing Stop (for example, 2-3%)
• In less volatile markets: set closer to the current price (for example, 0.5-1%)

There is no universal formula for all cases. You need to analyze the volatility of each specific market and adjust according to your trading style.

Advantages of Trailing Stop

Maximize Unlimited Profits: Instead of setting a fixed take-profit level (which might be hit too early if the trend continues), Trailing Stop allows you to “sit” on profits longer. The take-profit level becomes flexible with market movements.

Save Time and Effort: You don’t need to constantly monitor price fluctuations to adjust orders. The automatic stop level moves with the market, allowing you to focus on other tasks.

Emotion Management: Automating helps you avoid impulsive decisions that could harm your portfolio.

Limitations to Know

Order Execution Risk: In markets with low liquidity or very fast price movements, the Trailing Stop may not execute at the exact set price. You might exit at a worse price.

Ineffective in Sideways Markets: When prices fluctuate without a clear trend, the Trailing Stop may trigger multiple times unnecessarily, incurring unnecessary trading fees.

Loss of Autonomy: Over-reliance on automation may reduce your ability to analyze deeply and make strategic decisions.

6 Effective Trailing Stop Strategies

Strategy 1: Trailing at a Risk Tolerance Level (R-Based)

Determine the maximum loss you can tolerate ®, then set the Trailing Stop at 1R, 2R, or nR depending on market conditions:

• Highly volatile markets → set at 2R or more
• Less volatile markets → set at 1R to maximize profit protection

Strategy 2: Use Parabolic SAR

The Parabolic SAR signal helps identify when momentum is about to end. When the candle approaches the SAR point, it indicates a potential reversal. You can set the Trailing Stop near the closest SAR point to secure profits before reversal occurs.

Strategy 3: Based on High/Low of Previous Candles

Use the high and low of previous candles as reference:

• Long position → Trailing Stop at the lowest low of the last 3-5 candles
• Short position → Trailing Stop at the highest high of the last 3-5 candles

Number of candles depends on whether the trading is short-term or long-term (.

) Strategy 4: Based on Support-Resistance Lines

This is a simple but effective strategy. If unsure about targets, place the Trailing Stop at key support/resistance levels. These levels are often respected by the market.

Strategy 5: Bar Plus ###High/Low Candles + ATR(

Set the Trailing Stop at the high/low of the latest candle, plus a percentage of the Average True Range )ATR(:

For example: current ATR = 60 pips → add 50% = 30 pips → Trailing Stop = previous candle high/low + 30 pips

) Strategy 6: Based on Moving Averages

Set the Trailing Stop to trail along the Moving Average ###commonly SMA20 or EMA20(. You can adjust the period depending on the trading horizon:

• Short-term trading → 10-20 period Moving Average
• Long-term trading → 50-200 period Moving Average

When to Use Trailing Stop?

Trailing Stop is most effective when you want to protect current profits while continuing to benefit if the trend persists. However, should not be used in sideways markets )sideway(, as orders may trigger multiple times unnecessarily.

This order type is especially useful in strong trending markets, helping you protect gains and cut losses promptly when the price reverses.

Conclusion

Trailing Stop is a powerful risk management tool when used correctly. It not only maximizes profit potential but also frees you from the pressure of constantly monitoring price movements.

However, success depends not on the tool itself but on how you use it. Choosing the appropriate Trailing Stop level depends on your trading style )short or long-term( and the volatility characteristics of each asset. Start with the strategies above, test on a demo account, and adjust to suit your personal approach.