In the Live Trading Room Webinars over the last few weeks, we have had several sessions on how to employ Trailing Stops in trading. Here is a visual recap of what was covered…
The chart below will walk you through the process of manually trailing the stop on a trade as price advances in an uptrend on this EURUSD 4 hour chart.
The trade begins when a trader takes a long position based on a Slow Stochastics crossover signaling a buy. When the trade is entered at that point, the stop is located at the level labeled “Initial Stop”.
As the trade progresses to the upside, and as price action takes out each successive high, the stop is moved up to the next higher low.
Looking at the chart for example, when price moves above the high labeled #1, the stop is move from the Initial Stop level to Stop #1. As price takes out the next high at #2, the stop is trailed from Stop #1 to Stop #2. This procedure continues as long as price continues to advance and make higher highs and higher lows.
We can see, however, that price retraces below Stop #4 thereby taking the trader out of the trade with a profit of about 325 pips.
Even though the retracement took out the previous low at Stop #4, the uptrend on the pair is still intact.
With that in mind, the trader can re-enter the trade when price takes out the previous high at #5. When price trades above that high, the stop would then be placed below the previous low at Stop #5.
When price takes out the next high at #6, the entire process begins again.
Trailing a stop in trading can be a very effective strategy to “lock in” profit as the trade progresses… in this case to the upside. It is important, however, not trail the stop too closely behind the current price at which the pair is trading. This method of manually trailing the stop based on the previous low in an uptrend provides the trader with a critical guideline. While it certainly will not prevent stop outs, it will permit the trade to have a bit more room in which to develop.
In the case of a downtrend, the strategy would be reversed as the pair made lower highs and lower lows.