Trailing Stop Order Strategies Explained
Publish on 2023-03-20
Mastering common strategies is necessary to help traders earn more profits using trailing stops. Below are several common trailing stop strategies for your reference.
Regardless of which trailing stop strategy is used, the key is to know how to determine and set the stop-loss point so that most of the previous profits can be ensured when the market reverses.
I. Indicator-based Trailing Stop Strategies
1.1 Moving average
One common strategy is the moving average trailing stop strategy, which uses the moving average price as the reference for the stop-loss point. Moving averages most commonly used for reference are:
- For the short-term trend - 20 MA
- For the mid-term trend - 50 MA
- For the long-term trend - 200 MA
To set the stop-loss point for the trailing stop order, take the moving average price that suits your position strategy for reference and calculate the difference between the current market price and the moving average price. When the market falls below the moving average price and could decline further, the stop-loss should be triggered to lock in the previous profits.
1.2 Average true range (ATR)
The ATR indicator-based trailing stop strategy utilizes the Average True Range (ATR) indicator to determine the stop-loss point for the trailing stop order. The ATR is the moving average of the asset price volatility over a certain period of time, and it is primarily used as a reference for determining entry and exit points. The principle of reference is that the higher the ATR, the higher the chance of a trend change, and vice versa. The confirmation of the trailing stop price point based on the ATR indicator can be referenced below:
• Find the current ATR value according to current market conditions.
• Choose a multiple of the current ATR value: 2 ATR (short-term), 4 ATR (mid-term), and 6 ATR for the long term.
• Confirm the stop-loss point for the trailing stop strategy based on the direction of the position: for long positions, set the stop-loss point at the high point price minus the corresponding ATR value, and for short positions, set the stop-loss point at the high point price plus the corresponding ATR value.
1.3 Fibonacci retracement
The Fibonacci retracement indicator is one of the most commonly recognized analysis indicators used by traders. It is a horizontal line that represents potential support or resistance levels where prices may reverse. This indicator can be quite effective when analyzing trending markets. Using this indicator to implement a trailing stop strategy can be performed in two directions based on the underlying market trend:
- When the market is trending downward, find the most recent significant high and low points in price fluctuations. Use the Fibonacci retracement tool and connect from the high point to the low point to find the potential rebound pressure level given by the indicator. You can set the stop loss point at the rebound pressure level in the Fibonacci retracement during the downward trend.
- When the market is trending upward, find the most recent significant low and high points in price fluctuations. Use the Fibonacci retracement tool, then connect the low point to the high point (this operation is the reverse of that used in the downward trend) to find the potential pullback support level given by the indicator. You can set the stop loss point at the pullback support level in the Fibonacci retracement during the upward trend.
Besides these three indicators, you may also use other technical analysis indicators to determine stop-loss points for your trailing stop strategy.
II. Price-based Trailing Stop Strategies
2.1 Percentage trailing stop
Percentage trailing stop is a system that follows trends to set the stop-loss point of the trailing stop based on the percentage change in price. For example, in a long position, the stop loss point is set at a price point trigged by a 10% decrease from the price trend line’s highest point.
2.2 Support and resistance trailing stop
This strategy refers to utilizing support and resistance levels to determine the stop loss point of the trailing stop. For example, in a long position, the stop-loss point is set near the corresponding support level. When the price falls to the support level, the position is closed to lock in the previous profits.
2.3 Single candlestick trailing stop
Single candlestick trailing stop strategy refers to executing the stop-loss point of the trailing stop based on the high or low point of a single candlestick. For instance, when the market takes a downturn, the stop-loss point is set at the low point of the previous candlestick to lock in the profits from a long position. Once the price falls below that trigger point, the position will be closed. It is worth remembering that this strategy is only suitable for ultra-short-term trading in the event of rapid market swings, helping traders enter and exit quickly, while also locking in profits.
Important Note: Investing in any market involves risk, thus investment decisions should be made with caution. The contents of this article are for informative purposes only and does not constitute any form of investment advice. Please manage risks and make prudent-independent-investment decisions as the sole party bearing risk.