Praise of the trailing stop

 

There are many arguments against the use of a trailing stop. This instrument does not have many friends.

I am thinking, for example, of the difficulty in assessing change in volatility, or momentum, once you are in the trade. 

This makes setting the trailing stop correctly (or ideally) almost impossible.

But there is another aspect of the trailing stop that is often overlooked: The defensive power of this instrument. 

Beginners in particular tend to give away accumulated profits.

Instead of realizing the gains...

Which is worse.

Accumulated profits still turn into losses if the trader is not careful.

In the long run, this behavior has a negative impact on trading results. 

It is also difficult for a beginner to understand that trading is first and foremost a defensive game (the analogy to modern soccer or other similar sports is deliberate).

The main advantage of a trailing stop is this: it reduces your losses. 

Suppose the trader opens a long position in EUR/USD and hedges it with a trailing stop set at 20 pips. His position initially goes into profit briefly (5 pips), but comes back down and is eventually stopped out. The trader has realized a loss. 

If he works with a fixed stop, then he would have realized a loss of 20 pips. 

If, on the other hand, he uses a trailing stop, his loss is limited to 15 pips. 

Why? 

The position was in profit for a short time at the beginning (5 pips). So, the trailing stop moved 5 pips with it and stood at 15 pips distance from the entry.  

You might think that that is not much.

But if the trader does this systematically, then he can increase his net result substantially. 

And this is part of the "real work" of a trader.

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