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Trailing stop loss strategies in trending and momentum driven markets

17 May 2022
I’ll go through three different strategies to try and protect your gains as well as squeeze more juice out of your trades. Read below to find out more.

The first strategy on the list is one which I’m sure some of you will be familiar with and that is modification of the standard multiple of ATR strategy. However, instead of manually calculating the points at which to place our stops, there is an automated indicator called the Chandelier stop/exit that we can use. The creator of this indicator recommends using an input period of 22 days and a multiple of 3xATR. This can obviously be tailored to suit your needs, but that’s the baseline recommended settings. We can see in the chart below how this would have allowed a trader who had initiated a long position in AUDJPY to ride the uptrend nicely with the Chandelier stop flashing a warning sign to exit the trade when price fell below the Chandelier green line (highest high – 3xATR). It also works on the short side as indicated by the sell label, when one decides to take a bearish view on the instrument they are trading.

AUDJPY.png

(Source: Tradingview - Past performance is not indicative of future performance.)

The 2nd strategy involves the use of shorter-term more reactive (exponential) moving averages. It depends the time frame you trade on, but one could go as short as a 5 period EMA to a 21 period EMA. Using the same instrument, AUDJPY, we can see the 21-day EMA would have worked well in keeping the trade open and sending an exit signal when price closed below the moving average. A crossover strategy can also be used. It could be when the shorter-term moving average crosses below the longer-term moving average (when long) and vice versa when short.

AUDJPY_moving_average.PNG

(Source: Tradingview - Past performance is not indicative of future performance.)

The last strategy involves using the swing low of any pullbacks throughout the uptrend and vice versa for a downtrend. So as we can see in the graph below price retraced and made a swing low (circle) and the exit sign would have been when price closed below this level, indicated by the arrow.

AUDJPY_Swing_low.PNG

(Source: Tradingview - Past performance is not indicative of future performance.)

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