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What’s the Best Way to Trail Your Stop Loss?

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Happy Friday!

This week’s question comes from Taylor, who asks:

What’s the best way to trail my stop loss when trading Forex?

One of the hardest parts of trading is knowing when to trail your stop loss.

Trail it too soon and you get stopped out prematurely.

Trail it too late and you take an unnecessary loss.

Lucky for you, today’s post is going to break it all down. By the time you finish reading, you’ll know your options and the pros and cons of each.

I’ll also share the process I use for deciding when and where to trail my stop loss.

Last but not least, I’ll give my thoughts on the notorious breakeven stop loss.

What Are Your Options?

When facing any decision in life, it’s a good idea to take a step back and look at your options. It helps add structure to the decision and often presents the best choice with little effort.

As traders, we have three options when it comes to using and trailing a stop loss.

  1. Use one but don’t move it
  2. Use one and trail it
  3. Don’t use one at all

Although number three is an option, it isn’t one I’d ever use or recommend.

I’m including it because I receive far too many emails each week from traders who’ve lost a substantial sum of money by not using a stop loss at all.

All I can say is, don’t make that mistake. Not only does a stop loss order help protect your capital, but it also allows you to size your position properly.

So that leaves us with numbers one and two from the list above.

While the first option is certainly better than the last, I can’t think of a recent situation where I used a stop loss but didn’t trail it once the market started moving in my favor.

However, timing is key. Move it too soon and you get stopped out before the trade ever had a chance. Move it too late and you’ll take an unnecessary loss.

So now that we know our options, let’s discuss some specifics.

The 3-Step Trailed Stop Loss

I often talk about the process of good trading. The truth is, it’s a combination of several processes working together. One of those processes deals with using and trailing a stop loss.

Now, I won’t discuss the initial stop loss placement much in this post. I wrote an entire lesson on the subject, which you can read here.

The general idea behind the process below is that by following the market’s movements, you’ll be able to decide when it’s time to move your stop loss. This makes sense because it’s precisely the same as placing your stop on the initial setup.

Without further ado, here are the three steps I follow when trailing my stop loss.

Step 1. Wait for the break

If you’ve followed me for a while now, you’ll know that I mostly use the daily time frame. Since I trade with New York close charts, it means that each 24-hour session closes at 5 pm EST.

Not only is this important when scanning for buy and sell signals, but it’s also essential when trailing your stop.

Provided you’re trading a market that has momentum, you’ll want to wait for the market to close above or below the next key level before getting too aggressive with moving your stop loss.

Take the EURUSD daily chart below as an example.

EURUSD setup on the daily time frame

While the market was somewhat sideways prior to forming the bearish pin bar above, the intermediate trend was pointed lower.

Note that when trading a pin bar, your initial stop loss should go above or below the long wick. See the chart above.

Now, when trailing your stop, it’s important to wait for the market to present the opportunity. And if you’re an end-of-day trader like me, that requires waiting for the day to close below the next key level.

EURUSD step one to trailing stop loss

The daily close below the next key level confirmed the break. That completes step one of our three-step process.

Important: I use New York close charts where each daily session closes at 5 pm EST. You can go here to get access to the same charts I use.

Step 2. Wait for the retest

Notice there’s a lot of waiting here. That is deliberate.

When you’re trading the daily time frame, it sometimes takes days before you can safely begin to trail your stop loss order.

Again, the goal is not to break even as soon as possible. I apologize in advance if this sounds offensive, but moving your stop when you’re in profit by 10 pips is a rookie mistake.

If you do that on the higher time frames, I can just about guarantee you’ll get stopped out too soon.

The purpose of waiting for the retest is two-fold…

  1. It helps to confirm the break in step one
  2. It gives you a starting point to begin trailing your stop loss

Let’s take another look at our EURUSD example.

EURUSD step two trailing stop loss

Notice how after I entered short, I waited for the pair to close the day below the next key level. I then waited a few more days for the market to retest the broken support level as new resistance.

You could also trail your stop above the first bearish candle following our pin bar. That’s a perfectly viable option. However, it does leave your stop order exposed which can be a drawback, particularly in volatile market conditions.

I’ll admit that this is a relatively conservative approach. You don’t necessarily have to wait for a break and retest to trail your stop, but it will give you the best chance of allowing the market to work for you.

Step 3. Trail your stop loss

The last step involves actually moving the stop loss order. The exact methods for this vary by trading platform, but many of the newer ones allow you to simply drag the order to the new position. Be sure to check with your broker if you’re unsure.

The position of the new stop loss depends on how the market retested the level in step two. Ideally, the order should always be placed at a level that would negate the trade idea, if achieved.

Let’s go back to the EURUSD example.

EURUSD step three trailing stop loss order

Upon retesting the key level as new resistance, the pair sold off quite aggressively. My stop loss would now go approximately 10 to 20 pips above the high of that candle. 

At this point, if the euro were to rally and take me out of the position, there’s a good chance it would continue higher so the positioning above makes sense.

You continue to do this until the market either reaches your target or hits your stop loss. Notice how EURUSD behaved the same way following a subsequent close below the next key level.

To be clear, there is no way to know if the market will move beyond the first support or resistance level. You’ll need to use what you’ve learned about price action to determine whether momentum is strengthening or waning.

The 'Lazy' Method

If you’re trading a strong trending market, you can use a two-candle rule to determine when to start trailing your stop loss.

Allow me to explain…

The first step is to wait for two 24-hour sessions to close following your entry. During this time, your stop loss remains in its initial position.

Provided the market is still trending in your favor, you would move your stop above or below the daily candle that formed after your entry. In other words, your stop order will always be at least 48 hours behind the current price.

By waiting for two daily candles to close, you allow the market to move away from your entry. Again, this only works well in a trending market.

You can make it three, or even four candles if you want. There’s no hard and fast rule here, as it comes down to whatever works best for you. It will also depend on your anticipated holding period.

Just know that a three-candle close may allow you to stay in the trade a little while longer. However, it also means you could give up more unrealized gains, should the market reverse on you.

Moving Your Stop Loss to Breakeven

Let’s imagine for a moment that you just sold the EURUSD. After a few hours you check back in to find the pair has lost 30 pips.

Apparently, the ECB dropped a bombshell that didn’t sit well with Euro bulls. That’s good news for you.

It’s getting late so you decide to trail your stop loss to break even before going to bed.

The next morning you roll over to look at your phone and see an alert from your broker that your stop loss order was triggered.

Bummer. But hey, at least you moved that stop to breakeven, right?

You finish your morning routine and decide to check on the markets. To your dismay, you find the EURUSD trading 100 pips lower from the breakeven stop loss you set the night before.

Upon seeing this, you decide to sell now. You’ve already missed 100 pips and you sure as heck aren’t going to miss out on the rest of the move.

By the end of the day, the EURUSD has bounced by 40 pips. Not wanting to hold the position overnight, you decide to get out for a loss.

You went to bed the night before with thoughts of profits, woke up with no profits, and now you’re about to go to bed with a loss of 40 pips.

Does any of that sound familiar?

I’ll bet it does. Even writing this scenario takes me back to my early days when I’d trail my stop too soon and take trades based on the fear of missing out (FOMO).

So what’s the solution?

Simple. Give the market room to breathe. Don’t make the mistake of moving your stop loss too soon, simply to avoid a loss.

Instead, listen to the market. It will always tell you when it’s time to begin trailing.

Trading is a balancing act. Although your number one job as a trader is to protect your capital, your second most important job is to let winning trades run.

You can accomplish both by reducing your risk. If you’re only risking 1% or 2% of your balance on each trade, you’ll be much less likely to trail your stop loss too soon.

By reducing your risk, you’re effectively protecting your capital and increasing the likelihood that you’ll let winning trades run.

Final Words

Like most things, there is no right or wrong answer here. It comes down to what you prefer and what gives you the best chance of coming out ahead in the long run.

Remember that your number one job as a trader is to protect your capital. That can’t be overstated. One way you can do that is by using a stop loss order on every trade.

Whether you trail it or not is up to you. However, knowing that protecting your capital is a priority can serve as a guiding light. In most cases, you’ll find it appropriate to trail your stop loss, at least to some degree.

It’s a balancing act though. You need to trail your stop to protect your capital, but you also don’t want to suffocate your trade by moving it too soon. After all, your winning trades have to pay for the ones that lose.

Your Turn: Ask Justin Anything

I’d love for this weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.

To do that, I need your help.

Here’s what you can do to get involved and have your question answered in next week’s post:

  1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
  2. Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.
  • adi says:

    Great work sir,
    please make a lesson about pivot point.
    how to get perfect pivot point. thanks

    • Justin Bennett says:

      I don’t use pivot points, at least not the ones you’re probably referring to. I interpret all of the support and resistance levels on my charts.

  • PhanAnh says:

    Great teacher! thanks for your lesson. Best wish Sir…

    • Justin Bennett says:

      You’re welcome. Enjoy your weekend.

  • Hernando says:

    Good evening Justin, interesting article and very real, I am one of those who dominated my fear and SL moved it very soon, since I started working Dia and 4H, I have learned to place the SL without thinking if they are 50 or 100 pips, for that, the capital management is working at 2%. .
    Justin would be possible as it says the previous comment of Adi, an explanation on the form to apply and for that they serve, the pivot points in the operative Day and 4H.
    Thank you
    (Translated by Google)

    • Justin Bennett says:

      Hi Hernando, please see my response to Adi above.

  • Uzoma Nnamdi says:

    Thank you sir. this is a great lesson for me

    • Justin Bennett says:

      Cheers. You’re welcome.

  • Jane Winston says:

    Great article Justin! Some invaluable tips above that i can implement into my trading.
    What are your thoughts about using automatic trailing stop loss?
    Furthermore what are your thoughts about dynamic stop losses such as “Chandelier Stop” which is a dynamic stop loss based on ATR and EMA 20 or 50 which closes position once you have a MA crossover.
    I like your conservative stop loss approach for my swing trading (1D Timeframe) and will be smt that i implement.

    Thanks again.

    • Justin Bennett says:

      Thanks Jane. Glad you found it helpful.

      I’m not a fan of either. I prefer to do things manually as it forces me to study and interpret the price action on the chart. Plus any automation will use arbitrary levels which isn’t ideal.

  • Ajay says:

    Justin at present MT4 provide facility of trailing SL when out deal is in profit and we are expecting that it may go further in out favour why we don’t use automatic trailing stop loss by this we will be in a position to collect sum dollars trailing stop loss can be keep higher side like our trade in out favor with 300 dollars we can use trailing sl WITH 200 pips by this way we will be in a position to collect atleast 100 dollars if trade go against us what is your opinion

    • Justin Bennett says:

      See my response to Jane above.

  • Piliso says:

    Thats great sir, thank you

  • Vern Sheets says:

    Are most successful Forex traders like yourself running longer trades with trading size at $50 per pip to earn a living trading forex? Or are most forex traders. Scalping at a higher $ amount per pip. I had an instructor at OTA say if you can gain 13pips a day you could consider your self successful.
    Looking for feed back.
    I get your subscription daily
    Best Regards
    Vern Sheets

    • Justin Bennett says:

      That’s tough to answer. I don’t know of any stats that could split the difference.

      However, if you read some of the books such as Market Wizards, you’ll notice a theme that points to the idea that most super successful traders hold positions for a longer duration.

  • Augustus Amaefule says:

    A great lesson indeed, keep on this endeavor and remain blessed.
    Thank you.

    • Justin Bennett says:

      Pleased you enjoyed it. Have a great week.

  • furaha kaisi says:

    SORRY JUSTIN, HOW MUCH % IS AT LEAST SAFE TO RISK PER TRADE, example if I have 1000$ and I use 0.04 lot 3 position in EURUSD. do I have to enter other pair or just this EURUSD is enough

  • marcel says:

    hi Justin

    what is a reasonable monthly roi percentage that a dedicated trader should be able to realise?

    also what is a very good monthly roi percentage that is still feasible?

    I really do enjoy your articles

    • You’re going to have good months and bad months, so I wouldn’t focus on monthly ROI. You’ll be much more likely to force trades if you do. Instead, measure your performance quarterly or every six months.

      I don’t like to talk about what a trader “should” make as it’s incredibly subjective. It also doesn’t serve much of a purpose in my opinion.

      See this post for my views on setting trading goals:

      https://dailypriceaction.com/articles/forex-trading-goals

  • ANANT says:

    what should be an ideal lot size to trade in $ 500 account

  • marcel says:

    cut your losses short and let your winners run.

    I have a problem with this advise. what is the right way to cut your losses short when the market moves against you almost from the start.

    I like to trade like a robot. just follow my plan and do not deviate from it. I will leave my sl as it is even if the market is moving against me.

    I have seen many times where I closed the trade prematurely, that it just turns around on its way to profitville.

    I have also experienced it many time where it will just keep on moving against me until my sl is hit

    the way I cut my losses short is to risk not more than 1% of my account. I look for a suitable sl level and then adjust my position size to accommodate my sl so that my risk is not more than 1%.

    I only move my sl towards profitville if there is a right setup like a higher low.

    I am doing this right or am I missing something?

    I always try to trade consistently

    • Thanks for your questions. I’ll add them to my list of upcoming post topics.

    • Kanika says:

      Your words sound so so much familiar. Right now even I’m going through the same phase.

      It is so frustrating to see that the stock moves in the profit direction as soon as, either you exit (booking some loss) or your SL is hit. But I’m trying to keep patience and trying to find that one thing that I’m doing wrong.

      I’m finding comfort right now in the fact that at least prediction of direction and levels is still happening but there is sth seriously missing in right entry & exit and calculation of SL.

      I’m hopeful that my entry-exit-SL issue will also be resolved one day. Hoping and wishing the same for you. All the Best!

      • Use the daily time frame and stay patient when trailing your stop loss. It’s usually best to keep it at least two to three days behind the current price in a trending market.

        Hope that helps.

  • Kanika says:

    Thanks Justin! Your words always are able to give some guidance in the journey towards being a profitable and successful trader!

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