BE CONSERVATIVE WITH TRAILING STOPS

                   To move or not to move my stop order—that is the question. Emotions are
a powerful thing to overcome when you are watching the market move
against a profitable trade. Many traders live by the advice “Never let a
winner turn into a loser,” and use trailing stop losses to protect profit

or at least remove risk by moving their stop order to a breakeven price.
But many traders struggle with when to move the stop order, how far to
move it, and whether they should use a trailing stop loss at all. Using trailing
stops is a balancing act between potential risk and potential reward.
Although you might cut the risk out of your trade by moving a stop order
to break even, you could also cut out the profit. Many traders are too
aggressive with trailing stops and end up making nothing on a breakeven
trade that would have made a healthy profit if they had given themselves
more room.

                     Whether you are going to use a trailing stop should be decided before
you open a trade. The risk management section of your trading plan should
detail whether trailing stops are acceptable, how to determine new stop
levels, and when you should move the stop. Without a written plan you’ll
be left to decide what to do while the trade is open and your emotions are
active, which is never a good place to be. This section provides guidelines
for using trailing stops to ensure that you’re not following too close.

Enter and Manage on the Same Timeframe
                                      When you are using a trailing stop, use the same timeframe you entered
the trade with to determine when and where to move your trailing stop.
Traders commonly use a lower timeframe to manage their trailing stop,
but this practice doesn’t put your trailing stop in tune with the timeframe
you are trading. If you use a lower time chart to manage the trailing stop,
you might not be giving the trade enough room to maneuver. Assume for
a moment that you planned a trade using the daily chart and then use an
hourly chart to trail the stop order. If you place stop orders on the hourly
chart, you might be stopped out during the several fluctuations that price
goes through in order to create one daily chart candle. Trailing stops should
be managed on the same timeframe with which you planned the trade.

Trailing Price Action
                             Using price action on the timeframe with which you planned the trade is
an excellent strategy for trailing your stop loss. As each candle closes on
your chart, you have all the information you need to move the stop. Using
price action, a trader will move her stop every couple of candles once her
trade has been profitable for at least one candle. This strategy allows the
trade room to become profitable without being stopped out at breakeven
too soon and gives the trader an opportunity to profit from each trade
by trailing just below or just above price action. Occasionally the market
will reverse and the trader might be stopped out at breakeven or at a
smaller loss than initially planned, but that is just the nature of this trading
game when you use a trailing stop. This technique is demonstrated in
Figure 4.3.

                    Figure 4.3 demonstrates a trailing stop using price action. At point 1,
the trader bought EUR/USD on a dip during an uptrend. At point 2, the trade
was profitable after two candles had closed, so the trader moved his stop
loss to breakeven. At point 3, the trader moved his stop order up as the market
moved in favor of his position. Every two candles the stop was moved
to protect profits until the market reversed and the trader was stopped out.
Chapter 5 expands on this topic as a technique for managing profit.Personally I am not a huge fan of trailing stops. I think every trade

                            should have a set amount of risk and an ideal profit target, which is significantly
greater than the amount you have risked. If you continually use
trailing stops, it is likely that you will end up with trades that should have
reached their profit targets but were stopped out at breakeven or less than
their intended profit target. These trades are worse than a loss, in my opinion.
Breakeven trades that would have reached their profit targets lull a
trader into believing he has managed risk properly when in reality he might
be hurting his overall profitability. What would happen if you just set the
trades in motion and forgot about them? You’d probably lose more trades,
but you would also make more money per trade, just as you originally
planned when you opened the trade.