As long as the price is constantly going in a direction favorable to you, you have no problem with the position.
However, as soon as the price unfolds, you must make a decision each time: this is a short-term movement in the opposite direction (and then you must remain in position) or the beginning of a new trend in a disadvantageous direction (and then you must close the position).
Trailing stop - one of the techniques that allows you not to exit the market in the event of short-term and insignificant price movements in an unfavorable direction and at the same time save the lion's share of the accumulated profit.
Unlike a regular stop
Sliding feet are a whole family of different techniques, united by a common principle.
The idea is that when you open a position, you set a stop loss that protects you from adverse price movements in the early stages of the position’s “life”.
As the price moves in a direction favorable for you, the stop order also moves in this direction. However, when prices begin to move in the opposite direction, the activation price of the stop order does not change.
A trailing stop always moves towards a favorable price change until the position is closed.
Let's look at this technique with an example.
Suppose on October 28 we made a decision to purchase Gazprom shares at a closing price of 151.2 rubles per share. We set a stop loss of 2% below the minimum price of the same day - at 148.2 rubles.
Whenever the stock price reaches a new peak, we will calculate the difference between the value of this peak (high price) and the level of the initial stop loss.
This value can be considered an analogue of “paper” profit (although it is not considered from the purchase price, but from the stop loss level). Next, we will multiply this value by a coefficient lying between 0 and 1, add the resulting value to the initial stop loss price level.
As soon as the minimum price in the market falls below the stop loss price, we will sell the shares at the stop order.
In our case, the application of such a strategy would allow the investor to maintain a position until the trend reversal and get the maximum profit.
Of course, the main salt of a moving stop consists in choosing a coefficient value. If this ratio is too small, the strategy will protect too little of the profits and skip too significant market movements that are disadvantageous to you. If this ratio is too large, you will often close the position having lost a significant share of the profit. The final choice of coefficient is yours, but for most markets ranging from 0.5 to 0.8, it works quite well.
What to do if you disciplinedly sold your stocks on a sliding stop, and the price turned around and began to grow further? Should you jump into the outgoing train and buy these papers again? A clear answer to this question cannot be given - it is necessary to take into account the totality of all factors.
One thing is for sure: you should not buy only if it seemed that you left the position too early.
If the current situation complies with your purchase rules - buy, but do not do it only under the influence of emotions.
The stock market legend man, American industrialist Bernard Baruch, was so influential on Wall Street that the press tracked his whereabouts, believing that his absence or presence in the office was driving markets.
Bernard Baruch said: “I constantly sell shares, which then still grow, - and this is one of the reasons why I was successful. In many cases, I would make even greater profits if I continued to hold these shares, but I could also receive a significant loss in the event of a price drop. ”
When asked Nathan Rothschild if he had any special stock market technique, he replied:
"Definitely. I never buy at the bottom and always sell too soon. ”
You can read more about how to set a regular stop order here.
What is a moving stop loss and is it needed?
In general, trailing stops are most suitable for traders who trade within the day and simultaneously open positions on several instruments. It can be quite difficult to keep track of all the papers and pull the stop manually. Naturally, it is necessary to competently approach the selection of trending tools. Since if you use trailing stop loss trading in flat, you will catch it quite often.
But personally, I like to pull the stop by hand most of all. This gives better results in trading. Since the market periodically changes the volatility and mechanics of price behavior. For example, sometimes the trend movement is very smooth, with small areas of consolidation, and sometimes with significant pullbacks. If we push the stop loss manually, it is much easier to track. In the case of a competent pull-up of the stop on its own, behind the zones of consolidation, or behind the levels, the effectiveness of trade will increase. In particular, in my trade I use some formations built on this principle. And now let's move on to setting a trailing stop in Quick. I’ll tell you about the example of a Sberbank futures.
How to set a trailing stop in QUIK?
So, right-click on the order glass and select the “new stop order” item. Then it changes the type of stop order to take profit. After which we will have the next window, look at the figure (Fig. 1).
Next, we need to prescribe the appropriate parameters. For example, if we bought futures for Sberbank at a price of 9,800 and we want to sell it no lower than 9850, then in the “take profit, if price is here.
And so that the transaction is guaranteed to close, do not forget to expose it. Then select the required number of contracts and press enter.
We can also place a take profit and stop limit order (Fig. 2). It differs in that here we can set a protective stop loss. You can read more about this here.
That's all. I hope that this material will benefit you. All profit.
Sincerely, Stanislav Stanishevsky.
PS. For more information on setting a trailing stop in QUIK, see the video.
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What is a trailing stop?
Trailing stop allows you to get maximum profit from trend movements. There are many ways to use a trailing stop, and we will focus on each of them.
In essence, a trailing stop is a protective stop-loss order that captures profit as the price moves in your favor. A deal will be closed only if the market turns against your position by a certain number of points.
For example, you bought Apple stock at a price of $ 200 and your trailing stop is set at a distance of $ 10. This means that if the price rises to $ 220, your trailing will be $ 210 (220-10), and you will close the deal when the price drops to $ 210.
There are two ways to implement a trailing stop. The first is automated, in which the stop loss automatically follows the price of a certain number of points. Most trading platforms currently provide this feature. The second method is manual transfer of stop loss.
Automatic trailing stop is based on arbitrary levels that do not have real value in the market. Therefore, we will consider it, and focus only on the manual trailing stop.
For example, we can transfer stop loss to the minimum of the previous day:
We cannot predict how long the trend will last. But we can use the trailing stop to take the profit that the market can give us.
In most cases, you will not be able to take the maximum profit from the trends. Often there will be situations when the price first moves in your favor, and then your stop is knocked out by a random movement. Therefore, many traders refuse a trailing stop and say that it does not work.
However, if you learn to use the trailing stop correctly, you will be able to take a lot of profit points.
How to use trailing stop in a trending market?
As we know, any trend consists of rising highs and lows. This means that we can transfer a trailing stop below the border of each pullback (the previous minimum price movement). If our stop is hurt, this will mean that the structure of the trend has broken and, most likely, it will stop or reverse.
Market makers often chase after traders. Therefore, often your stop loss can be affected by a random price movement. To prevent this, place a stop loss at a distance of 1 ATR from the border of the current pullback.
This method works best when the market trend is clear and consistent.
In the case of a strong trend, when the price moves almost vertically up or down, it is best to transfer the stop loss as tightly as possible to the current price movement. Usually such movements are too short, and most often after them there is a sharp turn of the price in the opposite direction.
In this case, we can tighten the stop loss for each minimum of the previous candle. This technique will allow you to take most of the profits if the trend unfolds. When you notice that extremely large candles appear on the market, and the trend becomes more and more steep - transfer stop loss.
A trend line connects the tops or bottoms of a trend movement. If you have to redraw the trend line because the trend is getting steeper, then it is likely that the trend will end soon and the price will cross the trend line.
Moving Stop Loss by Moving Averages
Trailing stop can be moved by moving averages. For this we need:
- Determine the strength of the trend.
- Use a suitable moving average.
- Close a position when the price closes outside the moving average.
For example, if you want to take the maximum profit from a short-term trend, you can transfer the stop loss for the 20-period moving average and exit the transaction if the price closes outside of it.
You can use 20 MA for short-term trends, 100 MA for medium-term trends, and 200 MA for long-term trends.
You can also exit the market at the intersection of moving averages. We close the position when a moving average with a shorter period crosses a moving average with a longer period, for example, 5 MA crosses 20 MA.
Moving averages work best when the price moves smoothly along the trend. When the market changes its direction sharply, moving averages may lag behind its movement, and you will miss part of the profit.
Stop loss transfer by ATR indicator
Never use a fixed trailing stop without taking into account current market volatility. Imagine that your stop loss is 20 pips, while the market moves an average of 200 pips every day.
Therefore, we will use the ATR indicator to set a trailing stop based on current volatility. To do this, we need to take the current ATR value and use a specific factor. For example, we can use 2 ATR for a short-term trend, 4 ATR for a medium-term trend and 6 ATR for a long-term trend.
Trailing stop on a clean price chart
We can transfer our trailing stop, focusing only on the chart and the current value of the price.
You can transfer a trailing stop at a distance of 10% or 20% of the maximum price. For example, if you buy Apple stock for $ 200, your trailing stop is placed at a distance of 10% or $ 20.
In the end, we can use a fixed level to take profits instead of the stop pull technique. Profits can be taken at the next levels of support or resistance.
At levels, we can exit part of the position, then tighten the stop, and enable the price to continue moving in our direction.
Which of the following techniques for pulling up the foot should you use? If you prefer stability and are ready to be content with moderate profit, combine the technique of taking profits at the next levels of support or resistance with a further transfer of the stop. If you want to capture all the trend movement, try to stay on the market until it reverses.