So hi guys, hi from Andrea Unger, we spoke about stop loss, take profit and today it’s a time to discuss about trailing stop.
So Trailing Stop is an order to close the position in case there is a retracement in the profits shown.
So let’s say we are long, the market is going up and at a certain point the stop loss we initially posed let’s say here is moved up to follow, to trail the position.
Is this useful or not?
I don’t use it normally, in 99% of cases I don’t use trailing stops in my strategies and I don’t do this for two main reasons.
The first reason is that it doesn’t help.
I tested, I ran so many tests in many strategies and it was very very seldom when I found a benefit in the performance of a strategy using a trailing stop.
Why did I run the test?
Because I know that it is very annoying when you have a position in a good profit and this profit goes away and you don’t close it keeping a little bit of that profit at least, so when you give it that all back and you also make maybe a loss, it’s really annoying.
So I tested, I tested with different combinations of trailing but I never found a decent outcome.
The second reason is that it’s also difficult to handle the trailing stop with the common software, common trading software, because sometimes if you don’t use it carefully you might get some mistakes in the calculations, so some too optimistic outcome in the performance report but then in real time are not true. It’s just the way the software handles the trailing stop.
I’am talking about Trade Station, Multicharts, so I mean good software, but trailing stop sometimes is not used properly, so you have to be careful about it.
These are the reasons why I don’t use it and the most important is the first one, you don’t get a real benefit if you look at the sum of the total number of occasions when you would use a trailing stop in all the strategies that you trade, you see that at the end of the day you don’t get a numerical benefit, you don’t make more money using a trailing stop.
Of course you get a better psychological help because you feel that trailing stop is good but the result in terms of money made is normally worse.
So as said trailing stop is good psychologically and it’s popular because there are many mentors out there discussing and talking about trailing stop which makes feel they are very good and very complex in their managing the trades structure, which when you make the calculations and you run through the numbers you see it’s not really that good as they claim.
Wait, this is all true for the sort of hit and run, a pim pum pam trading which is the one I do and most of you probably do.
So positions with a time horizon of a couple of hours, hours, or some days.
This does not apply to a long term trend following trading, because in that case it is logical again to use a trailing stop in your trading, because when you have a position which has been opened for a long time, it’s logical to adjust the exit point getting it, narrowing it to the level the market is currently trading, but this becomes true for technical reasons too.
Because after a number of weeks, months, that you are in a position there are situations that change and most probably you get setups that give you a technical reason to close the trade if there is a retracement in your position.
So it’s a completely different story, but most probably it does not apply to most of you.
I don’t think there are many long-term followers listening to me, because we simply have a different kind of approach to the markets.
So that said, trailing stop yes, no?
I would say no, I would say no because it does not lead to any concrete benefit apart from long term trend follower, and it is also, it might be dangerous programming it into the software.
Now obviously there will be programmers saying “Ah, you are an idiot, you don’t know how to use the machines, you just have to be careful” yes everything is true, I’m not, maybe not an idiot, but I’m not certainly a NERD in programming but I also believe that many people out there are not really, extremely experienced in using the programming software.
So I believe that it’s useful to tell them that it might be dangerous if you don’t know exactly how things work to use a simple string “set trailing stop” or things like that, which might lead to unrealistic results and when you see things that are too good to be true you know by now, listening to me, that most probably they are not true.
So it’s dangerous from that point of view.
So stop-loss yes! Absolutely!
The size depends on the type of strategy.
Take profit yes or no depending on the type of strategy this is what we have discussed.
Trailing stop I would better say no!
I think it’s more or less useless, that’s my personal point of view.
That’s it, bye guys see you next time ciao from Andrea Unger