Trailing Stops May be Killing Your Results
Most traders understand the concept of cutting your losses and letting your winners run. But knowing and doing are two different things. Many traders I meet and work with struggle with winning trades. They have their losses taken care of, but they also cut their winners too short.
Why do we cut our losses too short?
Fear of losing the unrealised profits. Fear of something that hasn’t happened yet. Only we’ll imagine it and suddenly talk ourselves out of holding until the end.
One solution many people come back to me with is “well, why don’t you just trail the stop loss to lock in the profits?”. The idea being that by trailing the stop loss you get the best of both worlds.
Which sounds logical. Only, if you trail it too high, guess what? You’re cutting your winners too short.
Only now, instead of doing it manually, you are automating it.
If you trail that stop tight, and the price moves against you, it doesn’t matter whether you manually exited because you lost your bottle, or you automated it because your dragged your stop loss tightly.
The end result is the same.
Your winning trade was not given the opportunity to reach it’s full potential.
Accepting the fact that your winning trade may end up being a losing trade by the end is part of the psychological aspect of trading that you need to overcome if you are to be profitable. If you are too precious about your money that you keep too tight a grip on it you will suffocate your trading.
Trailing your stops too tight can suffocate your trading results by getting you out of profitable trades too early. In my mind, I hate getting out of a trade prematurely. If my stop gets hit before my system has generated a signal because I trailed it too closely, then I’m annoyed.
Don’t get me wrong. I always use a stop. But its there to protect me against losing any more than my maximum risk. I do not use it to exit my trades.
So be mindful of where you place your stops. Consider the question, is trailing your stop loss the same as just banking your profits too early?