TRADETHINK ARTICLES

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 TradeThinkâ„¢ clients. I usually like to show examples of both losing (minimize losses) and winning trades (protect profits) but currently TradeThinkâ„¢ 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 TradeThinkâ„¢ 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.

About the Author

Chris Morse is the Developer of the TradeThink trading system. He has been involved in the development of trading strategies for nearly ten years. Mr. Morse developed a very robust system which is now in private use at one of the largest FCM's and has earned sizable returns for the last 3 years. Mr. Morse now focuses his time exclusively on developing and managing his systems.