WTF is a Trailing Stop Loss? Breaking it Down

“Where you want to be is always in control, never wishing, always trading, and always, first and foremost protecting your ass.” Paul Tudor Jones

Ever wondered how pro traders ride massive trends where profits just keep piling up while they do nothing?

You know, the kind of trend that seems unstoppable and keeps climbing higher?

Here is their secret: they use a trailing stop loss, exits and a risk management plan.

No wishing. No crystal balls.

Now, I know what you are thinking:

“It doesn’t work.”

“I’ve tried it, and the market always hits my stop before the trend takes off.”

Here is why that happens:

• You are using the wrong technique

• Your stop is too tight (Most Common)

Sorry but we are going on an ADHD journey to show you how this happens. Remember my Bitcoin system that I never shut up about.

Here it is with a nice wide 30% trailing stop for the most volatile asset in history. The system has positive expectancy, it massively outperforms bitcoin as you can see by the blue area line and by the net performance.

What if we cut that stop loss down to a fixed amount of 10%

Wow, where did your profits go? Yes, smaller position sizes and wider stops is the way to go.

• Your expectations are not realistic

Let’s fix that.

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What is a Trailing Stop Loss?

A trailing stop loss is like a bodyguard for your trades. It moves with the price as it rises, locking in profits, but also protects you if the market turns against you.

Here is how it works:

• Buy a stock at $100 with a $10 trailing stop.

• If the stock rises to $120, your stop moves to $110.

• If the price falls to $110, you exit with your profits secured.

Simple, right?

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Why Use It?

Let’s be honest. You and I cannot predict how long a trend will last. But with a trailing stop, you can take what the market gives without needing a crystal ball.

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The Reality of Trailing Stops

Even with a trailing stop, you will not catch every trend. Sometimes, you will watch your winners turn into losers when the market reverses and hits your stop before continuing higher.

It is frustrating, but if you stick with it, the rewards can be massive. Think 1 to 20 risk to reward trades opportunities most traders never see because they quit too soon.

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How to Trail Your Stop Like a Pro

Here are five effective methods:

1. Moving Average (more of an exit, I suggest using a stop with this one.)
   Use a 20 period MA for short term trends, 50 period for medium term, or 200 period for long term. Exit when the price closes beyond the MA.

2. Average True Range (ATR)
   ATR adjusts for market volatility. Use 3 ATR for short term trends, 5 ATR for medium, and up to 10 ATR for long term. The “Chandelier Stops” indicator automates this process.

   

3. Fixed Percentage Based Stops
   Set a percentage, like 10%. If the price drops by that percentage from its peak, you are out.

4. Market Structure
   Use swing lows (or highs in a downtrend) to set your stop. To avoid stop-hunting, place your stop slightly below the swing low using 1 ATR.

5. Parabolic Moves
   For explosive trends, tighten your stop and exit if the price closes below the previous candle’s low.

The Big Question

There is no one size fits all trailing stop strategy. The key is knowing the type of trend you want to capture and using the right method for your goal.

Maybe we can all do a conference call about risk management soon! If you all are interested.

If this little nugget of wisdom helped you finally get stop losses, do me a solid—like, share, and follow for more! 🚀 No sponsors, no fancy team, just one passionate trader hustling to share the knowledge I wish I had back in the day. Let’s level up this trading game together! 📈

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