In this post, I will share with you my strategy to apply a trailing stop.
Please, note that I am applying a trailing stop loss only in trend-following trades and only when a trade is opened on a key level. I trade price action patterns, so the following technique will be appropriate primarily for price action traders. Moreover, my entries are strictly on a retest.
Spotting a price action pattern, I am always waiting for its neckline breakout. (if we talk about different channels, then by a neckline we mean its trend line)
Once I see a candle close below/above the neckline, I set my sell/buy limit order on a retest.
Stop loss will strictly lie below the lows of the pattern if we buy and above the highs of the pattern if we sell.
I spotted a horizontal trading range on an hourly time frame on AUDUSD. I set a sell limit order after a breakout of its neckline. Stop loss is lying above the highs of the pattern.
Once we are in a trade, you should measure the pattern's range (distance from its high to its low based on wicks) and then project that range from the entry to the direction of the trade.
In the picture above, the pattern range and its projection are the underlined blue areas.
Once the price reaches the projection of the pattern's range, you should move your stop loss to entry and make your position risk-free.
Move stop to breakeven in traders' slang.
Then you should let the market go.
📈If you are holding a long position, you should let the market retrace and set a higher low and then a new higher high or AT LEAST an equal high. Once these conditions are met, you can trail your stop and set it below the last higher low.
📉If you are holding a short position, you should let the market retrace and set a lower high and then a new lower low or AT LEAST an equal low. Once these conditions are met, you can trail your stop and set it above the last lower high.
In the example above, stop loss was modified when the price set a new lower high. Stop loss is now lying above that.
Catching a trending market, you should trail your stop based on new higher lows / lower highs that the price sets. Occasionally you will catch big winners.
How do you apply a trailing stop?