November 29, 2011
- in Uncategorized by schooloftrade
Trailing Stops & Trade Management Day Trading Strategy
One of the most important aspects of a successful trading strategy is trade management, and most new traders fall victim to using the wrong type of management style for their specific type of trading strategy.
Trailing stops are one aspect of a day trading strategy that most new traders learn very early in their career, however, trailing stops are NOT the holy-grail of trading like the marketers would like you to think.
What is a trailing stop? This is a stop loss order that is ‘trailed’ closer to the current price to ‘lock in’ profits or eliminate risk on a particular trade.
For most people, the idea of a trailing stop is easy to understand, and most of us (myself included) have tried this many times, and had trouble making it work in a real-time trading environment.
The idea is simple with a trailing stop. If you are long, you move the stop higher as price rises, and if you are short, you do the opposite. This will lock in profit, lock out risk, and make you more money…right? Not so fast.
Have you ever been in a trade, only to have a stop that is too tight, and then you get stopped out, only to see the trade keep going for more profits? This isn’t fun, and its caused mostly by a trailing stop. The key to successful trade management day trading strategies is using a stop loss that is tight enough, but not too tight.
The best way to use a trailing stop in my opinion is to use the levels of support and resistance in the market tell you where and when to move your stop. For example, if you are long, and price moves higher, once you see a ‘swing low’ you can then move your stop UP just below the swing low. The same is true for the short trades, just the opposite.
In my personal day trading strategy, I like to use a ‘profit trigger’ which ultimately works like a trailing stop, but it locks in profit when the trade has gone a certain number of ticks in my direction.
For example, If I am long on crude oil I may designate 20-ticks as my profit trigger, and when we get to 20 ticks of profit on the trade, the stop loss order is automatically moved to a specific point, such as your entry point, to remove all the risk.
Once my trade has achieved its profit trigger, then I will begin to trail my stop, using swing highs and lows, and the trigger lines on my charts.
I do NOT use an automated trailing stop loss, it will not be accurate enough to properly manage the trade. I trail my stop MANUALLY at the best locations that our trading strategy has designed for us.
Our members are trained on using profit triggers, trailing stops, and every aspect of a professional day trading strategy.
