When I first started trading, I
struggled with the idea of letting my profits slip away. Every time the market
moved in my favor, I would find myself thinking, "This is great, but
what if it turns around?" I would start to get nervous and, in many
cases, close the trade too early—only to watch it continue moving in the
direction I wanted. Sound familiar?
It didn’t take long for me to
realize that managing profits is just as important as managing risk. That's
where trailing stops come into play. For me, using trailing stops was a
game-changer. It was a way to protect my profits while allowing my trades the
room they needed to run and grow. If you’re new to trailing stops, or if you’ve
heard of them but aren’t sure how they can work for you, I want to share my
experience and explain why trailing stops are one of the best tools in a
trader’s arsenal.
What Is a Trailing Stop?
To begin with, let’s break down
what a trailing stop is. A trailing stop is a type of stop loss that moves with
the market price as your trade becomes more profitable. It’s designed to lock
in profits while still giving your trade the freedom to move in your favor.
Let’s say you’re in a buy trade on
EUR/USD, and the market is moving higher. As the price moves up, your stop
loss—once set at the entry point—can be adjusted to protect the profits you’ve
made. In other words, if the market goes up by 20 pips, your stop loss
automatically moves up by 20 pips. If the market continues to rise, the stop
loss follows it, keeping your trade protected. However, if the market reverses
and hits your new stop loss, the trade is closed with a profit.
The key difference between a
regular stop loss and a trailing stop is that a trailing stop automatically
adjusts, while a regular stop loss stays at the level you set, no matter what
the market does.
What Are The Benefits of Trailing Stops?
Now that we know what trailing
stops are, let’s talk about why they are so powerful. From my experience,
trailing stops offer several key benefits that can dramatically improve your
trading. These are the reasons why I believe trailing stops are a game-changer.
1. They Lock in Profits
The main benefit of using trailing
stops is that they help protect your profits. Imagine you enter a trade, and
the market moves in your favor, but then it starts to pull back. Without a
trailing stop, you might close the trade out of fear that you’ll lose the
profits you’ve already gained. I’ve been there before—closing a trade too soon,
only to watch the market continue in the direction I had hoped for. With a
trailing stop, the trade stays open, and as long as the market is moving in
your favor, the trailing stop moves with it, protecting your gains. If the
market reverses, the trailing stop locks in the profit you’ve made and closes
the trade for you.
2. They Let You Capture Bigger Moves
Another benefit of trailing stops
is that they allow you to capture larger market moves. In the past, I would get
scared if the market moved too quickly and close my position too early. But
with a trailing stop, I can let my trades run longer, knowing that my stop loss
is moving up to protect my profits. This gives me the opportunity to capture
bigger moves in the market and maximize my profit potential. It’s like being
able to ride the wave without worrying about falling off.
3. They Remove Emotion from the Trade
One of the hardest parts of trading
is managing emotions. Fear, greed, and anxiety can cause us to make impulsive
decisions that hurt our trading performance. I know from personal experience
that closing a trade too early because I was scared of losing profits was one
of my biggest mistakes. Trailing stops can help take the emotion out of the
equation. Once I set my trailing stop, I don’t need to constantly monitor the
trade. I can walk away and know that if the market moves against me, my stop
loss will protect my profits. It gives me peace of mind and allows me to focus
on other opportunities in the market.
4. They Improve Risk-to-Reward Ratios
As traders, we always hear about
the importance of risk-to-reward ratios. I can’t tell you how many times I’ve
analyzed a trade and felt unsure about whether it was worth the risk. Trailing
stops improve your risk-to-reward ratio by giving you the ability to lock in
profits while still allowing for larger price movements. By letting your trade
run and adjusting the stop loss along the way, you can potentially increase
your reward without increasing your risk. It’s one of the simplest ways to
improve the quality of your trades.
5. They Are Simple to Use
Finally, trailing stops are
relatively simple to set up and use. In most trading platforms, setting a
trailing stop is as easy as clicking a button or adjusting a slider. You don’t
need to be an advanced trader to start using them. For beginners, it’s a simple
yet powerful tool that can make a big difference in your trading. The best part
is that once you set a trailing stop, you don’t have to constantly monitor the
market. You can let the system do the work for you.
How to Use Trailing Stops in Your Trading?
Now that you know why trailing
stops are so beneficial, let’s talk about how to actually use them in your
trading strategy. There are a few different ways to incorporate trailing stops
into your trades, and it’s important to find the method that works best for
your style of trading.
1. Use a Fixed Distance Trailing Stop
One of the most common ways to use
a trailing stop is by setting it a fixed distance from the current market
price. For example, if you’re in a long trade and the price moves 50 pips in
your favor, you can set your trailing stop 20 pips away from the current price.
If the price continues to move up, your trailing stop will follow. If the
market reverses by 20 pips, the stop loss will be triggered and the trade will
be closed with a profit.
2. Use a Percentage-Based Trailing Stop
Another way to use a trailing stop
is by setting it based on a percentage of the price movement. Let’s say you
want to protect 2% of your profits as the market moves in your favor. As the
market price increases, your stop loss moves with it, ensuring that you lock in
2% of the total price move. This method can be useful if you want to protect a
specific percentage of your trade’s value rather than a fixed amount of pips.
3. Combine Trailing Stops with Technical Indicators
You can also combine trailing stops
with other technical indicators to improve your trading decisions. For example,
I’ve used moving averages to set my trailing stops. When the market is above a
key moving average, I might set my trailing stop 20 pips below the moving
average, allowing my trade to follow the trend. If the price moves against me
and the moving average is breached, the trailing stop will kick in and close
the trade. Combining trailing stops with technical indicators can give you an
additional layer of protection and improve the accuracy of your exits.
Common Mistakes to Avoid with Trailing Stops
While trailing stops are a
fantastic tool, they’re not foolproof. There are a few common mistakes that
traders make when using trailing stops that I’ve learned to avoid through trial
and error.
1. Setting the Trailing Stop Too Tight
One mistake I used to make was
setting the trailing stop too close to the market price. When the price moved
in my favor by just a small amount, my stop loss would get triggered, and I
would miss out on bigger profits. I’ve learned that it’s important to give the
market some room to breathe. If your stop loss is too tight, you’ll be stopped
out too quickly. On the other hand, if it’s too loose, you might lose more than
you’re comfortable with. Finding the right balance is key.
2. Not Using a Trailing Stop at All
Another mistake I made early on was
not using a trailing stop at all. I would watch my trades and manually move my
stop loss as the market moved in my favor. But this was time-consuming and
error-prone. I’d get distracted, and sometimes I’d forget to adjust my stop
loss in time. Using a trailing stop automates the process and ensures that my
profits are always protected.
3. Being Too Focused on the Stop Loss
It’s easy to get too fixated on the
trailing stop and constantly check if the market has moved in your favor. But
this can lead to unnecessary anxiety and overthinking. I’ve found that it’s
important to trust the process. Once I’ve set my trailing stop, I focus on the
big picture and avoid micromanaging my trades. Trading is about patience and
discipline.
Final Thoughts
In my experience, trailing stops
are an incredibly useful tool for protecting profits and improving trading
performance. They offer a simple yet effective way to lock in gains while still
allowing your trades to run. Trailing stops help remove emotion from trading,
improve your risk-to-reward ratios, and give you the peace of mind to focus on
other opportunities.
If you haven’t yet incorporated
trailing stops into your strategy, I highly recommend giving them a try.
They’ve helped me become a more disciplined and profitable trader, and I
believe they can do the same for you.