Cut your losses short and let your winners ride.
Timeless trading advice.
But how do you actually do that?
The first part is simple…use stop losses.
The second part is a lot more complicated.
One way that profitable traders maximize their winners is to trail their stop losses. It's not the only way to do it, but it works for a lot of traders.
So in this post, I'll give you 7 effective trailing stop methods that could dramatically increase the profitability of your trading strategies.
I've seen these methods work for other traders and a couple work for me.
Remember that successful trading is all about figuring out what works for you. These strategies can work well with some entries and not so great with others.
Always test your current exit strategy against a trailing stop loss, before using it in live trading.
Also remember to try one thing at a time. Before you move on to the next exit strategy, have some hard data on why a certain type of trailing stop doesn't work well for you.
It's common for traders to give up on a strategy, just because they had a few losses. If you jump from one strategy to the next without a plan or any data, you are going to take a ride on the Trading Silodrome…and that's the kiss of death for any trader.
Alright, here we go…
1. R Trailing Exit
This trailing stop loss uses multiples of risk and can be an easy way to automate your stop loss strategy. Let's say that your stop loss is 100 pips.
So when your trade is 100 pips in profit, you will move your stop loss to breakeven. Then when your trade is 200 pips in profit, you will move your stop loss to +100 pips. When your trade is 300 pips in profit, you move your stop loss to +200 pips…
…and so on.
The drawback of this method is that it doesn't take market volatility into account. So you might get stopped out in very volatile market conditions.
Now, using the risk multiple can factor in volatility a little because your stop loss will tend to be a little wider in more volatile market conditions. But the levels are not adjusted according to indicators like Average True Range (ATR) or other similar measurements of volatility.
This method also might not work well with very volatile currency pairs or pairs with large spreads. So you also need to consider those elements.
But there is also a big benefit to this method…
This method eliminates any second guessing as to when and where your stop loss should be moved. You don't have to second guess support/resistance levels, or worry about indicators that can change with every tick or repaint.
Once you set your stop loss, you know exactly when your stop loss needs to be moved.
Another way to do this is to use an automated Expert Advisor (EA) for MT4, like this one.
2. PSAR Trailing Stop
The Parabolic SAR was invented by Welles Wilder and it can be a good way to see when momentum could be coming to the end. As you can see in the chart above, the indicator can be a good way to lock in profits in a trend.
This indicator can cut your profits short. But this can happen with any exit strategy.
This exit strategy is pretty forgiving when it comes to riding trends. The indicator gives a good stop loss cushion when markets are moving fast, but tightens up the stop when things get quiet.
3. X-Bar Trailing Exit
Another way that you can trail your stop loss is to use the highest high, or lowest low of the last X-number of bars. For example, let's say that you use a 3-bar exit.
If you go short, you would move your stop loss to the highest high of the last 3 bars. You could also add a criteria that the trade needs to be at least 1R in profit, before you start trailing the stop.
This can create a fairly tight stop loss and you will probably get stopped out pretty often, before you catch a runner. So if you are the type of trader that needs to win a lot, then this might not be the exit strategy for you.
Like the other methods in this post, this trailing stop might not work with your entry signal. So test, test, test…before taking it live.
There's no second-guessing when you need to move your stop loss. The exit strategy is very straightforward and can be automated.
This method can help you catch big moves, while keeping your losses small. Traders who enjoy the satisfaction of catching the occasional multi-R runner, should probably test this strategy.
4. Support and Resistance Trailing Stop
You can also wait for support or resistance levels to form during the course of your trade to move your stop loss.
Support and resistance levels can be very subjective.
If you aren't very sure of what a solid support/resistance level looks like, you can start to second guess your trading decisions. You really need to practice this method to become confident in this exit method.
Out of all of the exit methods on this list, this one provides the most latitude to improvise. Obviously this freedom can be a double-edged sword.
But for traders who perform better with a more intuitive approach to trading, this can give them the leeway to be more flexible in their exit, while locking in those sweet profits.
5. Bar Plus Trailing Stop
This method is similar to the X-bar trailing exit, but you would trail your stop loss on every new candle, plus a certain number of pips, to give you a cushion. A popular way to add a cushion is to add a percentage of the Average True Range (ATR) indicator.
For example, you could add 50% of the current ATR value to the high or low of a candle. If the current ATR value is 60 pips, you would simply add 30 pips to the high or low of each candle to determine your stop.
You could get stopped out very quickly in low volatility market conditions. But again, that could happen with any trailing stop method.
This is another cut-and-dry exit strategy and eliminates any guesswork. It can also be partially automated.
If this strategy works for you, a simple EA could be used to trail your stop loss while you are away from your computer.
Don't know how to code EAs?
No problem, this list of programmers can help you create the EA you need.
6. Moving Average Trailing Exit
Another way that you could trail your stop loss is to use a moving average. Every time a new bar prints, you would simply move your stop loss to the moving average price of the last bar.
A popular moving average is the 20 exponential moving average (20EMA). That can be a good place to start, but you should certainly test various types and periods of moving averages.
Like the other exit methods on this list, you can get stopped out “too early.” But if you have tested the strategy and are comfortable with how it works, then you will become comfortable with this and realize that it's all part of the game.
This is another black-and-white trailing stop method that is easy to automate. No second-guessing here.
7. 1R Breakeven
The simplest trailing stop that you can use is the 1R breakeven trailing stop. This is when you move your stop loss to breakeven when price hits 1R, or one multiple of risk.
For example, if your stop loss was at 100 pips, you would move your stop to breakeven when your profit hit 100 pips. So if you went short on this chart, you would move your stop to breakeven as soon as price hit the bottom of the green box.
Yes, this isn't technically a trailing stop loss because it doesn't trail price for the duration of the trade. But it's a simple way to prevent yourself from taking a full loss.
Moving your stop to breakeven can stop you out before your trade goes uber-profitable. So you have to test to see if a 1R stop would work well with your trading strategy.
On top of that, you still have to figure out where to take profit.
But this one simple tweak can reduce your average loss, which can improve the overall return on your account.
There can be two important benefits to moving your stop loss to breakeven. First, you can lock in a trade that is going in your direction. That can lift a huge weight off your shoulders and allow you to see the charts more clearly.
Second, once your trade is locked in at breakeven, this gives you the freedom to take more trades. When you take more trades, you increase the number of times that you apply your edge.
The trailing stop that you use will depend on your entry method and your Trading Personality.
If you are looking for a way to let your winners run, test out a few of these strategies. You can also use a split entry to take advantage of a trailing stop, while still using whatever works for you right now.
Then again, you might not want to use a trailing stop loss at all, it might be better for you to set a take profit level.
All that matters is what works for you.