Should we use trailing stop in trading?

Trailing stop yes or not?

There are divided opinions about this issue.

The basic concept of trailing stop is that when a trade has gone in our favour we should rise our stop price, such as if the price recedes we can keep some of our profits.

This, in principle, sounds quite well.

“Not to lose our profits” cannot be bad, and certainly it is not.

The problem comes when sometimes the market falls touching our trailing stop loss swiping us from the market to be continued by a even more stronger bull market as before.

In those cases we can be quite angry actually.

This is something that can also happen in bear markets.

The only way to avoid this problem is buying again at certain similar level.

In the cases when the price of the asset keeps falling after touching our trailing stop we will have saved some precious profits.

Trailing stop

Sincerely, the answer to the question if it is good or not will depend on every trader and the strategy applied.

Some people will do well with it and some people will not.

Eventually what will be very important is to see what strategy we are using.

If we are doing day trading it is difficult that we can win whether using trailing stop or not.

If we trade in a longer frame, for instance weeks, then we can win or lose using that stop. It will depend on our trading abilities then.

 

There is no doubt that in a great bull market, as we have usually in stocks, the best thing to do is to let profits run.

Although, some day we will have to get out, something that we will be able to do with a conventional way out or by using a trailing stop.

Experience using trailing stops

Someone that used to use this strategy was Nicolas Darvas.

This man used to do some sort of swing and trend trading.

He said that when a stock was trading higher would come a moment where the stock would be in a range area.

That range area should give us where to put our trailing stop, considering that we had previously bought the stock before the first big rise.

The trailing stop should be just below that consolidation area.

As Darvas said, his stops were hit many times.

If Darvas thought that the stock could kept rising he would buy again later, when the stock resumed its rise.

I think that the best way to use the trailing stop is to do similarly to Darvas.

You have your position and if the stock rises you keep it.

When the big rise seems to stop after a few weeks or months or sluggish trading, I would use a stop close to the bottom area of the congestion zone.

If it is violated I wait for the moment when the stock rises again, if so.

On the other hand, if the stock enters a bear market I will do nothing, obviously.

Trailing stop example

Trailing stop forex

As we can see in the chart with my Spanish writings, I bought the stock in October and it rose until March/April where a congestion area was formed.

Well, my trailing stop would be just below that area, for instance.

Imagine that the price falls and I use the stop.

Perfect.

At least I would have kept a nice part of the profit.

If the stock keeps falling below 100 or 90, it will be in a bear market.

If that is the case I could even consider playing the bear side, but honestly, it is something we have better stay away from.

Using the trailing stop does not guarantee your success as a trader but neither “not using it”.