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Trading > Stop Loss Orders > Trailing Stop Loss Orders

Trailing Stop Loss Orders

Trailing stop loss orders have three uses:

  • To limit your losses,
  • To protect your profits, or
  • To prevent you from entering (or exiting) a trade too early or on a false signal.

Stops can be based on the high/low of the daily trading range or on a trailing percentage. Welles Wilder's Parabolic SAR is a further form of trailing stop.

The rules below are based on Screen 3 of the Triple Screen trading system, described by Alexander Elder in Trading for a Living.

Buy-Stop

When you get a signal to go long - place a buy order one tick above the High on the signal day. If price rallies, you will be stopped in on the next day. If price falls, the buy order will remain untouched. Move the buy order down to one tick above the High on the second day. Continue to lower the buy order on each subsequent day until price rallies and you are stopped in.

When you are stopped in, place a stop loss below the Low of the recent down-trend (the lowest Low since the signal day).

trailing stops: buy-stop

Sell-Stop

When you get a signal to go short - place an order to sell short one tick below the Low on the signal day. If price falls, you will be stopped in on the next day. If price rallies, the buy order will remain untouched. Move the sell-stop up to one tick below the Low on the second day. Continue to raise the sell-stop on each subsequent day until there is a correction and you are stopped in.

When your sell-stop is executed, place a stop loss above the High of the recent up-trend (the highest High since the signal day).

trailing stops: sell-stop

* Day 4 makes a new High and a new Low. If the High was made before the sell-stop is reached, the stop-loss will be placed as shown. If the sell-stop was activated before the new High was made, then the stop-loss would have been placed above the High of Day 3 and the trade would have been stropped out on making the new High.

Example

Intel Corporation is shown with a  blue 21 day exponential moving average and 7-day Stochastic  fuchsia %K and  aqua %D.

%K falls below 20. Place a trailing buy-stop just above the day's high of $33 1/2Move the buy-stop down to $33, above the High of day 2Move the stop down to above the High of day 3Move the stop down to $32 1/2 - one tick above the High on day 4We are stopped in at $32 1/2. Place a stop-loss below the lowest Low since day 1 (i.e. day 5)trailing stops: Intel buy-stop

  1. %K falls below 20. Place a trailing buy-stop just above the day's High of $33 1/2.
  2. Move the buy-stop down to $33, above the High of day 2.
  3. Move the stop down to above the High of day 3.
  4. Move the stop down to $32 1/2 - one tick above the High on day 4.
  5. The day opens with a new Low of $31 3/8 and then rises until we are stopped in at $32 1/2. Place a stop-loss below the Low (i.e.. the lowest Low since day [1]). Thereafter, price falls back to the day's Low, but fails to activate the stop-loss one tick below.

Inside Days

The rules for sell and buy stops are sometimes varied by excluding inside days:

  • no adjustment is made to a buy-stop if the day does not make a new low;
  • no adjustment is made to a sell-stop on days that do not make a new high.


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