To Trail or Not to Trail?

End of the Trail – James Earle Fraser

One of the most common ongoing causes of confusion amongst new traders is the question of whether or not to trail our stop, or to leave it in place. If regular, realistic earnings is the goal, then this issue is actually disguised, or appears to be a practical problem, when it is in fact, a psychological one.

Trailing stops are a psychological solution, not necessarily a practical one.

The idea of a trailing stop only ever really seems necessary in hindsight, after we see that the outcome of our winning trade has moved well beyond our expectations.

Human beings, as animals, are hardwired to hoard things, from food (which is why ‘Super-sizing’ works) - to money. Life is risky, and the opportunity of getting more for the same or less risk, gives us a better chance at survival and even reproduction.

We also forget in hindsight, that it is impossible to consistently predict which trades will have positive outcomes, and which trades will also have the biggest moves.

Look at it this way - it’s all about frequency and low-hanging fruit; the markets offer more 1:1 trades than 2:1, and more 2:1 trades than 3:1 and so on.

If my goal is to earn a living, enjoy trading and reduce stress, the best results for me personally come from a higher frequency of positive outcome trades. I find trying to predict big winners more stressful, difficult and closer to gambling.  I want as much certainty as possible, and the income is only certain when it’s banked in your account.

You haven’t earned your profits until they’re banked in your account.

Separately, from a technical analysis point of view, our trading strategy is either likely to hit profit, or not, and we must leave it free to do so without interference. Unless one has a clear reason to intervene manually, the most common outcome will be inconsistent trading results.

Remember, the reason we trade is to earn a consistent income from trading the markets. Some days will be easier than others - some days will bring misfortune and others mass fortune. Just understand that the bigger extreme moves are not the norm, and should be treated as exceptions to the rule, instead of predictable.

The most simple and definite solution would be to back-test and forward test both types of stop-management ideas over say, 100 trades each, and tally up the results. The stop-management rules are part of the strategy itself, and to change those is to create a new strategy.

In time, as we gain more experience, it will become obvious where we can improve our edge, but until then, our proven strategies help us to achieve our trading goals for beginner and intermediate traders.

Remember, we do have the option of multiple targets, but with everything we do at Trade With Precision, there has to be a very good reason to do something a certain way, and we need to be practical above all else in trading.

“What am I doing? Tearing myself. My usual occupation at most times.”

― Charles Dickens

Register for our next live webinars: "How to Learn a Simple 6 Step Trading Strategy"

Date: Tuesday, 27th October 2015, with Hao Sun

• 8pm Auckland, 6pm Sydney, 7am London and 3am New York

Or

Date: Tuesday, 27th October 2015, with Philipp Pfitzenmaier

• 8pm London, 4pm New York, 9am Auckland (next day) and 7am Sydney (next day)