Trailing Stop Loss

A trailing stop is a stop loss that ratchets. For a long, it only moves up. For a short, it only moves down. The point is to give back some open profit if the trend continues, and to get out when the trend bends by more than the trail allows. The trail can be a fixed distance, a multiple of average true range, the far side of a moving average, or the last swing. These are different systems. A 2 ATR trail and a "below the last higher low" trail will exit on different bars. Name the one you use. A trail you move by hand whenever you get nervous is not a trailing stop. It is discretion.

Choose the trail from the volatility and the swing size of the timeframe you are trading. A tight trail on a noisy higher timeframe will stop you on the first ordinary pullback and turn a trend system into a scalp you did not plan. A loose trail on a scalp will give back the whole scalp. Set the rule before the entry: what has to print before the stop moves, and how far. Then let it work for a sample of trades before you tighten it because one winner reversed to the tick.

Use a trail when the target is open-ended, a trend-following exit, or when you have already taken a partial at a fixed target and you want the rest to pay for a runner. Do not trail a range trade that was supposed to exit at the other side of the range. The trail will often hand back the middle of the range, which was your profit. Once the trail has moved to your entry, the remaining position is a free trade only if the stop will actually fill near the entry. In a gap it will not. "Risk free" is a slogan. Keep a small amount of gap risk in the mental budget.

Trailing so tight that every winner becomes a scratch, then abandoning the trail and giving back a large winner. Also moving a trail by hand to avoid a stop you can see coming. And trailing under every minor tick low, which is a trail of the noise. The last significant swing, defined in advance, is a trail. The last red bar is usually not.

Trails lag. They exit after the high, by design. Judging a trail by how much of the extreme it gave back will make you tighten it until it stops working. A trail also fails in a gap the same way a fixed stop fails. And an indicator trail, a parabolic SAR or a chandelier of ATR, will disagree with the swing trail. Pick one so the exit is a single decision.