The Daily Market Forecast... Lesson Day

Today’s Lesson: Trail Stopping

The idea of moving your stop loss automatically so it follows or “trails” price moving in your direction is alluring. The main deficit is that price can be “noisy” moving in choppy impulses and corrections that trigger the stop. You’ll miss plenty of great moves.

On the contrary, you don’t want to leave your stop the same after price has moved well in your favor but not to your profit target yet. Watching a winning trade lose is painful and unnecessary.

There are several ways to place a trailing stop. The first decision you must make is whether you want to manually adjust it or not. For automatic trailing stops any decent trading platform will allow you to enter the stop by points/dollars or percentage. If your initial stop is 4 points away, let that be the trailing stop. Easy enough.

If you’re willing to manually move the stop there are chart patterns and indicators that can smooth out the noise of the price move. Price pivots and moving averages are common. One less common indicator you can use is the Parabolic SAR. This was developed by the late Wells Wilder (along with RSI & ATR). It has a built-in acceleration formula so that it starts far enough away and the longer timewise price moves in your direction the tighter the stop becomes. See the chart for a visual reference. Your trading platform will likely have this built in.

Caution: You may be seduced into thinking this is also a great entry technique. The visual presentation can fool you. There will be too many periods where you are whipsawed out of your trades with too many stops in a row. Better to use it for trailing stops and possibly confluence of a trend change.

Trade Well,

Mike Siewruk

P.S. For a free “mini-course” packed full of lessons on HOW to trade the Blog… Watch this video.