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Advanced Techniques for Futures Trading: Trailing Stop Strategy

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Managing profitable positions efficiently is an integral aspect of achieving longevity in the futures marketplace. Addressing trade selection and quantifying risk are critical parts of effective trading, but having a strong trade management plan in place is also of paramount importance. Implementing a trailing stop strategy is one way to ensure that your trade management plan remains nimble and robust.

What Is a Trailing Stop?

A trailing stop provides a fluid approach to trade management. It’s a dynamic stop loss order that moves in relationship to evolving price action. After opening a new position at market, a trader can use a trailing stop to protect against downside risk, lock in profits, and maximize returns.

At first, the concept of trailing stops may seem abstract. For further clarity, consider the following progression of an active long position in the E-mini S&P 500 that is managed by a basic trailing stop strategy:

  1. Order placement: A resting buy limit order is placed at market (2650.25) with a 12-tick trailing stop.
  2. Market entry: Upon price-hitting entry, the limit order is filled at 2650.25, and a long position is opened.
  3. Trailing stop engaged: When the buy limit order is filled, the trailing stop becomes active immediately, and a stop-market sell order is initially placed 12 ticks behind entry at 2647.25.
  4. Price action: The ensuing price action determines the exact location of the sell stop-market order. In the event that price reverses against entry from 2650.25, the trailing stop stands firm at 2647.25. In the event that the market rallies, the trailing stop moves in tandem with price, on a tick-by-tick basis. If price rallies to 2655.25, for example, the stop market order will then be located at 2652.25, 12 ticks behind price.

Selecting an Ideal Trailing Stop Strategy

The primary motivation for using a trailing stop is either to limit losses or to optimize returns. That’s why administering a trailing stop strategy is so attractive ― it allows a trader to balance risk and reward as market conditions change.

The example above is a very basic trailing stop strategy. In practice, traders employ many different varieties, each specifically designed to secure market share in a unique fashion. However, each type features a dynamic stop-loss order that moves in relation to price action.

Here are several examples that illustrate the diversity of a trailing stop trade management approach:

  • Static: A static trailing stop moves with positive price action on a tick-by-tick basis. The initial stop is set a specific distance from the entry price and maintains the relationship as the open position develops. A static trailing stop may be used with or without a defined profit target. This functionality gives the trader a chance at potentially large gains through capitalizing on an extended trend.
  • Break-even: Break-even trailing stops are often used to ensure that a loss cannot be taken following beneficial price action. Upon price moving a predetermined favorable amount, the stop loss “snaps” to the original entry or “break-even point.” This strategy is commonly used to aggressively manage risk and guarantee that a once-profitable trade does not produce a loss.
  • Time-based: In many cases, trailing stops are used to manage open positions with a time-based parameter. Using a timing device, a position’s stop loss may be moved according to the passage of a minute, hour, or session. Trailing stop strategies based upon time can be extremely effective during periods of market volatility brought on by a scheduled. Trailing stop strategies based upon time can be extremely effective during periods of market volatility brought on by a scheduled economic data release.

Getting Started

The main argument made by traders who employ a trailing stop strategy is this: The market is always changing ― shouldn’t my trade management parameters shift according to evolving conditions? For more information on trailing stops and countless other trade management topics, a free consultation with a broker at StoneX is a great start.

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