This article will provide you with a systematic way you can make use of trailing stops, or “stop loss”, orders for your trading positions, in any market you trade. It was contributed by a fellow trader who believes this to be the best possible use of trailing stops.

One of the most important aspects of successful trading or investing is the proper use of “stop loss” orders. Once you have established a profitable trade, you want to use stop orders to both maximize trading profits, and minimize risk of loss in the event of a market reversal.

Fortunately, the management of stops is fairly simple, and requires very little effort to execute properly - the main point to remember is that you want to strike a balance between maintaining/maximizing profit and minimizing potential loss.

Here are some guidelines for managing the perfect trailing stop:

1. For a buy, or “long”, position, your initial stop-loss order should be placed one or two ticks below the existing low price for the previous 10 trading days at the time your order is filled and you establish a position in the market. (If selling short, then the stop is placed one or two ticks above the 10-day high.) Normal market fluctuation often retraces prices over the ground they have covered in the preceding week or two of trading - however, if your decision to buy a market is correct, then the market should not establish a new 2-week or 10-day low. If it does, it is very likely that the trade is ill-timed, and best abandoned.
2. This is the basic “rule of thumb” for a trailing stop: If long, adjust the stop order as necessary to maintain a stop-loss order just below the previous 10-trading-days’ low; if short, maintain the stop day-to-day just above the 10-day market high.
3. Always take, or closely protect, windfall profits. Specifically, if the market moves dramatically in your favor for two or more days consecutively (“dramatically” is roughly defined as including the equivalent of at least one limit-up day in futures trading, or an increase in price of at least 33% in stock trading). In this event, your stop order should be moved so as to insure a profit of at least half of any dramatic market move in your favor. For example: You are long cotton, and cotton prices surge 400-500 points over a 3-day period - at this point, your stop should be moved up to within 200-250 points of the recent market high. If you aren’t stopped out, it should remain at that level until the basic stop rule outlined in (1) and (2) above would require moving it to a higher level…then you would simply return to using that basic trailing stop guideline.
4. If you are stopped out of a position, but remain convinced that the market will move significantly in the direction of your original trade, you should only re-enter the market if and when the market makes a new 10-day high (or low, if selling short) - at that point, once again initiate a stop-loss order just outside the existing 10-day trading range.

That’s really all there is to running a perfect trailing stop. Follow these simple guidelines in stock trading or futures trading to realize maximum profits from winning trades, while keeping any losses small, manageable, and relatively painless.

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Today Bill Poulos released a new report covering the common questions he received with respect to forex trading.

Click here to grab that 55 Page Report

Ray

P.S. I’m interested in hearing your thoughts. Let me know…

• Did you find the Q&A helpful?
• Do you have any additional questions that weren’t covered by the report?
• Any comments?

Feel free to send your feedback as a comment to this post in the section below.

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