This is an age old question and always a very difficult one to answer in regards to trailing stops. Because the answer is…wait for it….”it depends.”
Don’t you just love those answers? Hedging both sides? But in reality it really does depend on the scenario. First, I want to make the case for using trailing stops in your trading. Here’s our trading with the Heating Oil Futures for the first three days of this week:
Over $3,000 in profits with trailing stops right? The reason is we have had two home run breakouts already this week – remember this is trading just a single contract.
Here’s the exact same trade set-ups but going for a fixed profit target – a fixed profit target that has proven itself to be quite reliable for us…
$676 in profits which for 3 days on a single contract I’ll take anytime, anyplace. But, it’s not $3,000 right?!?
Here’s the reality of trailing and my rules for trailing:
1. If you can trade multiple contracts trade 1 contract (or half your contracts) to a fixed target. Trail the second half of the position. I find psychologically it’s much easier to post profits and then trail since anytime you trail a trade, you are risking a portion of your profits.
2. Understand that your trade winning percentage when you trail will go DOWN. There are going to be situations where you turn a clear winner to a loser when trailing.
3. Understand that you trail to wait for the bigger moves – in every market I’ve ever tracked no market goes for the home run move everyday. If you can catch one a week you’re doing great. Realize when trailing your trading could be: losing trade, small winning trade, losing trade, small losing trade, small winning trade, HOME RUN. You need to be patient.
4. Realize that some markets are less suitable for trailing. Right now in current market conditions in the futures world the best trailing markets are Unleaded Gas Futures, Heating Oil Futures, some of the Agricultural Futures (Corn, Beans), and to a lesser degree the metals futures. However, the stock indices such as the Russell e-Mini, Dow e-Mini, S&P e-Mini, other markets such as Crude Oil Futures, Dax Futures, etc… are doing better going for suitable fixed profit targets. Just accept that not all markets are going to have enough momentum/volatility. Right now we’re trading in a period of very low volatility in general – this will be less favorable to breakout moves.
5. Forex markets are similar — you can definitely trail forex but accept the fact that a few times per year most pairs will go on a run – you will need to be patient as the forex pair(s) you trade consolidates. A consolidation could take many weeks and shakes out most impatient traders. Wait for it and you’ll be rewarded.
6. Don’t start trailing a trade until you have proven yourself to be a profitable trader using fixed targets. Bottom line this is more advanced and if you cannot trade profitably using preset fixed targets you’ll be relying way too much on luck if trailing.
7. Make sure you have an objective way to trail. Look at our first Heating Oils future chart — the red dots that kept coming down was our trailing stop moving down systematically. If you turn trailing into a subjective exercise your stress will go through the roof AND you will not get consistent reliable results. With our PTU trading systems we trade the markets in such a way that it’s like having a GPS on our charts. We always know our next move.
To trail or not to trail – that is the question – and hopefully the above will provide you some answers. Still have questions? Feel free to leave a comment.