Forex Strategies: How To Use Trailing Stops

This brief tutorial shows how you as a trader of stock, futures or Forex can use trailing stops to manage your risk as part of your Forex strategies.

This is one of the most important Forex strategies, but it applies equally well to trading the stock market, futures and E-minis.

Using stops not only helps protect you against losses when the market moves against you. They can also help you maximize gains when the market moves in your direction.

WHICH TYPE OF STOP TO USE?

Some traders like to use limit orders for their stops. I prefer using market orders to assure that my stop is filled (though it may not be at the price I prefer).

How do I protect against getting filled at a much worse price than I want? That’s where hedging with options come in.

I also place those orders in my execution platform (called a “hard stop”) not just in my head. Some people don’t like to place hard stops because they’re worried that it makes them vulnerable to stop running. I have no concern about that at all.

The brief video below demonstrates how to employ trailing stops in your Forex strategies like a pro!

Enjoy the video and please leave your comments below.

You’ll find the text below this video if you want to follow along.

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Video Text:

Hey traders. Doctor Barry Burns here with Top Dog Trading. And today we are going to talk about Forex Strategies. Specifically how to use Trailing Stops.

Trailing stops are stops that you move as the market continues to go in your direction so that if the market goes against your position, you don’t lose so much money.

Let’s get right into it. And here is one technique, there are several techniques that could be used. I’ll talk a little bit about the principles I believe in, and then also share with you one specific technique that I use all the time.

If you went long, and we just use this example over here, and let’s say you went long there. Alright. We had a momentum shift pattern and we are now looking to go to the long side. Okay, so my initial stop would be immediately underneath this low. The reason for that is, this is my cycle indicator, my timing indicator.

CYCLE INDICATOR FOR YOUR FOREX CHARTS

It’s very important to have a timing indicator on your charts. Here’s why:

What is a chart? A chart is a 2 dimensional object. Right, so we have, down here at the bottom, if you can see this. So down here, at the bottom, we have the x axis, which is time, and over here we have the y axis, which is price. And that’s it. A chart is a 2 dimensional object.

A lot of people look at price, they look at volume. And that’s all great, you should. But it’s very interesting to me that very few people actually have an accurate timing tool. And if you don’t have an accurate timing tool, and know how to use it, that means you are neglecting 50% of the information on that 2 dimensional object, we call a chart.

Well, how in the world can you establish a probability scenario for yourself, if you are eliminating, not even considering 50% of the information on the 2 dimensional chart? So that’s why you must absolutely positively have an excellent timing tool, so you know when to get in, when to get out. And we use that, not only for when they get in, when they get out. But also for our trailing stops.

By the way, if you are interested in my timing tool, my cycle indicator here. It’s not the topic for today but send me an email or click one of the links here, and I’ll invite you to webinar. I will give you the indicator for free, and teach you how to use it for free as well.

TRAIL THOSE STOPS

Okay, so anyway, what we are doing then basically is we are just moving trailing stops as one of our Forex strategies, since we are long under a cycle low. Now the cycle low is determined when the colored line gets down here to about 55. So this would be your next cycle low.

After the market goes up here, it’s a cycle high area, then I would move my trailing stop once that cycle low is established. I would move my stop from here, take it away from there and I put it right underneath that low. Usually with Forex, I’m going to do it one pip plus the spread.

Then, let’s see, our next cycle low is over here. So it would go right below these bars here. Okay next cycle low comes in here, so here is the marking on the indicator. Next one’s over here. So we put it under here. The next one is here, the next cycle low indication, and so we put it there. So as you can see, as long as record is trending, putting in basically higher highs higher lows, we are going to be able to stay in the trade.

THE TREND IS YOUR FRIEND UNTIL THE END

Now it’s not exactly quite that simple, because trends have a certain average length of time that they last. And so we are taking that statistically into consideration as well. We don’t want to overstay our welcome.

But the point is, once we make a profit, I usually will lock in some profits, if I buy here, or I got some profits in the very next cycle high. And that does 2 things:

1. Put some money in my pocket, and then if I get stubbed out for some reason, then I am not getting stopped out on as many lots, not as much size. So my losses remain small. And that’s critical. Absolutely critical.
2. So another thing we do is not only use our trailing stops in our Forex strategies, but we also look for targets, meaning that as the market reaches certain levels, we will go ahead and take some profit. And the reason for that is, because if you only use trailing stops to get out, then you’re giving back a lot of money, as the market retraces down. So targets allow you to attempt to lock profits in at the highs.

So it’s a money management technique, which all Forex strategies should have. Part of the money management that I teach in the course, again beyond the scope of this particular video. Which is specifically on trailing stops.

That’s one type of trailing stop, and of course there’s others. And let me just finish up by saying two things.

THE LOGIC OF STOP PLACEMENT

This type of trailing stop is based on a very very specific principle. And that principle is this, ‘Stops go where you are wrong’. That’s the basic principle of stops.

So what we mean by, ‘where you’re wrong’? What I mean by, ‘where you’re wrong’ is, when the reason for you getting in the trade no longer exists, your trade should no longer exist. You should be out.

For example, if we bought this cycle low here, our market goes up a little bit, maybe it hits the moving average, and comes down and takes out this low. Well then the reason for me being in this trade long, no longer exists, because I was buying a cycle low. And that cycle low was violated, therefore I need to be out right below that. So the reason for being in the trade no longer exists, therefore the trade should no longer exist.

THE POPULAR TYPE OF TRAILING STOP I HATE

A very popular type of trailing stop used in Forex strategies is using average true range (ATR), meaning that you incorporate volatility in determining how far to keep the stop away from the current market position. I don’t like personally, those types of trailing stops. And there are two reasons:

1. They’re usually too far away from my entry. And therefore I can’t hold to the critical principle of keeping your losses small, and letting your winners run. But the losses end up being big instead of small. Doing it my way, my losses are puny, tiny.
2. Also, I don’t like it because there’s a natural cycle in the market, of the market going between expanding volatility and contracting volatility. So the problem is by the time, an expanded volatility is measured, by whatever indicator you’re using, to get an updated measure of that expanded volatility. Often you are about to go into a cycle of low volatility. And therefore those, those stops can be taken out or vice versa.

Worse is actually vice versa, when your measurement is of low volatility and the market is going to go into a high volatility and take you out. So for that reason, because it’s based on historical volatility, there is a cycle between changing from high to low, I don’t find them to be helpful, moving into the future in real time.

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