Why you shouldn’t use trailing stops

I don’t write a lot about the technical side of trading. Why? Because it’s just not that difficult. I can show most traders how to stay on the right side of the market and where entries and targets are in a day or two. After that the real works begins. Trusting that the market will do what it’s supposed to 90% of the time. The method itself we employ is very simple, it’s how to get over your post traumatic trading experiences from trying to trade a lot of methods that were doomed from the start. That’s the real work. That is why the bulk of my writing focuses on the mental game.

But today, I am writing about a pure technical aspect of trading because it is very important to your bottom line. That subject is trailing stops. Trailing stops were used many years ago when computer systems became the rage. How else would you protect profits if you were going to let a program manage your trades? I am not a fan of computerized systems and in spite of them and all the technology available, 90% of all traders still lose so we know technology and computers are not the answer. Couple that with the fact that traders were making fortunes long before computers, we have to examine the fact that perhaps trading is a lot simpler than most think.

Nowadays, we trade intra-day in the emini S&P. We sit there during the day and watch our trades. There’s no need to rely on trailing stops. We will however move stops to entry or slightly above after taking some profits and letting the trades work, but trailing stops more often than not intra-day will take you out of a trade prematurely.

First off, you should always have a target for your trade before you ever click the mouse. You should know at least where it should go with a high degree of probability. All our trades come with targets in advance, multiple targets in fact. We don’t go long, then hope it goes higher moving and trailing our stops. We have set targets and all we need to do is monitor the progress of our trade. If we want to get out, all we have to do is click the mouse again. No need for tailing stops.

Let me clarify, if you have 10 points in a trade certainly lock something in just in case of a news event, but to move your stop closer and closer, as the trade moves will cut your profits most of the time. The market needs room to move, to back and fill. Again this is intra-day trading. We are sitting there watching the market. No need to trail stops, just move it to BE and then watch as our targets are hit as they are 90+% of the time. Without valid targets I can see why you would want to trail your stop because you don’t know where the market should go. The importance of knowing your targets in advance cannot be overstated.

We know before the open where our targets are for the day. All it takes is about 10 minutes of your time premarket and you will have your day mapped out. Then we simply trade toward those targets knowing they are hit with a high degree of accuracy. (we also know when they won’t be hit) Trailing stops are not necessary when you know your targets. Trailing stops are not necessary when you are monitoring the market.

Find your targets, trade toward your targets, and move your stops to entry. After that, it’s just a matter of letting the market do it’s work and get to your predetermined targets known in advance, taking partial profits along the way so you have absolutely nothing at risk and you can sit back and relax while the market continues in your direction.

Good Trading……JC!