The Importance of Trailing Stops

Trailing exit stops are one of the most important trading details you will ever come across in your trading. This is because most traders will pull a big winning trade way too early or let a small yet manageable losing trade turn into an even bigger loser. Trailing stops are used primarily for two reasons, to protect profits and to minimize losses on a trade.

Today I will show you several examples of trailing stops that are actually in use by our TradeThink™ clients. I usually like to show examples of both losing (minimize losses) and winning trades (protect profits) but currently TradeThink™ is only in all winning trades.

British Pound

Below in the chart you see a British Pound trade we are short from 8/3/2008 at 1.9373. The Pound closed Monday 9/15/2008 at 1.7785 for an open trade profit of 16 cents or $9,925 per contract. Our trailing stop is set at 1.8075. If the market reverses on us we can lock in 13 cents or $8,125. The difference between our stop of 1.8075 and the close yesterday is 3 cents or $1,875.

This is a very nice seasoned (time in trade) trend. We don’t want the trailing stop to be to tight. TradeThink™ shows the trade needing just a bit of wiggle room for slight pullbacks so we can stay in the trade if we get an even bigger trend.



Crude Oil (Brent)

Below in the chart you see a Crude Oil (Brent ICE) trade we are short from 9/1/2008 at 113.06. The Crude Oil closed Monday 9/15/2008 at 95.94 for an open trade profit of 17 dollars or $17,000 per contract. Our trailing stop is set at 102.74. If the market reverses on us we can lock in over $10 dollars or $10,000 per contract. The difference between our stop of 102.74 and the close yesterday of 95.94 cents is $7 or $7,000 per contract.

This is a newer trade entry and the stop is placed a little less tight by the TradeThink™ system. Once the trade matures the stop will tighten up proportionately. We don’t want the trailing stop to be to tight. The trade needs a little more wiggle room for stronger pullback so we can stay in the trade if we get an even bigger trend.



Gold

Below in the chart you see a Gold trade we are short from8/5/2008 at 891. The Gold closed Monday 9/15/2008 at 787 for an open trade profit of 104 dollars or $10,400 per contract. Our trailing stop is set at 827.60. If the market reverses on us we can lock in over $63 dollars or $6,300 per contract. The difference between our stop of 827.60 and the close yesterday of 787 cents is $30 or $3,000 per contract.

This is a trade that has pulled back slightly and the stop is placed TradeThink™ a little more tightly than it was a couple of days ago. As the trade matures further the stop will tighten up even more. We hardly ever want the trailing stop to be too tight. The trade may need a little more wiggle room for more of a pullback so we can stay in the trade if we get an even bigger trend.



Gas Oil (ICE)

Below in the chart you see a Gas Oil (ICE) trade we are short from 9/1/2008 at 997.50. The Gas Oil closed Monday 9/15/2008 at 899 for an open trade profit of 98.50 dollars or $9,850 per contract. Our trailing stop is set at 955.60. If the market reverses on us we can lock in over $44 dollars or $4,400 per contract. The difference between our stop of 955.60 and the close yesterday of 899 is $56 or $5,600 per contract.

This is a newer trade and the stop is placed by TradeThink™ a little less tight. Once the trade matures the stop will tighten up proportionately. We don’t want the trailing stop to be to tight or else we could get shaken out of the trade too early. The trade needs a little more wiggle room for pullback so we can stay in the trade if we get an even bigger trend.



Dollar Index

Below in the chart you see a US Dollar Index trade we are long from 8/8/2008 at 75.40. The Dollar Index closed Monday 9/15/2008 at 79.40 for an open trade profit of 4 cents or $4,000 per contract. Our trailing stop is set at 77.50. If the market reverses on us we can lock in over $2 cents or $2,000 per contract. The difference between our stop of 77.50 and the close Monday of 79.40 cents is $1.90 or $1,900 per contract.

This is a trade that has trended straight down and TradeThink™ has its stop loose enough so that it is not placed too tight. Once the trade matures or starts to pullback the stop will tighten up proportionately. We don’t want the trailing stop to be too tight especially when the trend is going straight in our direction. The trade shows a little more wiggle room for a pullback so we can stay in the trade if we get an even bigger trend.



As you can see from the above trades some stops are tighter than other stops depending on where in the trend a trade is. A seasoned trade such as the British Pound will have a much tighter stop than a more recent trade such as that of the Crude Oil.

Remember the importance of a good trading plan and implementing stops every day for protecting your positions. Most traders go about their daily trading routine without a comprehensive trading plan. A good trading plan should always include daily trailing stops.

Finally, trailing stops are important for every trade, every day. Good trailing stops should be predefined and tell you when and what price to get out of the trade. If the trade is a loser or a winner, you knowing exactly when and where to exit your trade is a key factor to your continued trading success.

Disclosure: Commodity trading has large potential rewards, but also large potential risks. You must be aware of the risks and be willing to accept them in order to invest in the futures markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy/sell commodity interests.

Notice: Returns are hypothetical. Hypothetical or simulated performance returns have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since trades have not actually been executed, the results may have under or over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight, no representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

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