In the world of trading, there is a widespread belief that trailing stops are a smart, efficient
way to lock in profits. However, this widely accepted strategy can often lead traders down a dangerous path, inviting fear and doubt into their decision-making process. Rather than enhancing your trading approach, trailing stops can cloud your judgment, causing you to deviate from your plan and ultimately hinder your potential as a trader. Let’s explore why relying on trailing stops can be detrimental to your success and why sticking to a well-defined trading system is the better approach.
The Contract You Make With Yourself
When you enter a trade, you are not just taking a random shot in the dark. You are making a contract with yourself. This contract is built around a fixed risk-to-reward ratio that you have defined based on a careful analysis of your trading system. Once the trade is initiated, your role is simple: follow the system and allow it to play out across time.
This is where many traders go wrong. They enter a trade, convinced they have the best strategy in place, only to introduce uncertainty with a trailing stop. The allure of trailing stops comes from the idea that they will lock in profits as the market moves in your favor. But this mindset invites fear and doubt into your trading process—two emotions that can undermine your entire strategy.
The Allure of Trailing Stops: A False Sense of Security
Trailing stops are often marketed as an intelligent way to protect profits while still allowing for potential upside. The logic seems sound on the surface: as the price moves in your favor, the trailing stop follows, locking in profits as the market progresses. It’s easy to see why this approach is so attractive to many traders, especially those who are anxious about losing profits from a winning trade.
However, this false sense of security comes at a high cost. When you rely on a trailing stop, you introduce the potential for fear-driven decisions. The fear of letting a winner turn into a loser can cloud your judgment, causing you to exit the trade prematurely, sometimes well before it reaches its true potential. In essence, trailing stops create an emotional rollercoaster, where you are constantly adjusting to avoid losses, rather than sticking to a plan that allows you to benefit from the odds over time.
Think of it like inviting a vampire into your house—you may think you’re controlling the situation, but ultimately, you’re letting fear and doubt take hold. Much like the vampire, once fear enters, it’s hard to remove.
The Importance of a Clear Entry and Exit Strategy
Successful trading doesn’t rely on reacting to every market move with anxiety or fear. It’s about following a clear, systematic plan that has been developed based on sound principles. When you have a well-defined trading strategy, your entry signals should be binary—either the conditions for the trade are met, or they are not. Similarly, your exit signals should also be clear: the trade will exit either at a predetermined target, stop loss, or time stop when the market signal ends.
This clarity in your entry and exit rules allows you to follow the plan with discipline. If your strategy has been proven over time, you can confidently let it play out, trusting the fixed risk-to-reward ratio that you’ve established. When trailing stops are introduced into the equation, however, you disrupt this process. Trailing stops tend to adjust based on market fluctuations, which often leads to premature exits. In doing so, they compromise your ability to allow your strategy to fully unfold and take advantage of the market’s potential.
The Danger of Premature Exits: Missed Opportunities
While trailing stops may lock in some profits, they can also cause you to miss out on larger, more profitable moves. Think about this scenario: you have a trade that is on track to make a $5,000 profit. But by using a trailing stop, you lock in a $1,000 profit when the market temporarily retraces before continuing in your favor. In this situation, you’ve left $4,000 on the table—profits that could have been yours if you stuck to your plan without interference from fear-driven adjustments.
The problem is that traders often feel that locking in some profit is better than letting the trade run its course. This mindset is rooted in a desire for instant gratification, but it’s detrimental to long-term success. If you constantly adjust your trades out of fear or anxiety, you will never fully realize the true potential of your trading system. The best trades often come after periods of loss or consolidation, and it’s critical that you stay in the game long enough to capture those profits.
Fear and Anxiety: The Root Causes of Trailing Stops
At the heart of the appeal of trailing stops is anxiety—the fear of turning a winner into a loser. It’s a natural emotion for traders, but it’s one that can be dangerous when it influences your trading decisions. Phrases like “never let a winner turn into a loser” are commonly thrown around in the trading community, but they don’t apply in a systematic approach to trading. The truth is, it’s not about avoiding losses at all costs; it’s about following your plan, even if that means accepting losing trades.
This lesson can be seen in a famous scene from The Karate Kid Part III. In the final tournament, Daniel is afraid to fight, wanting to give up and go home. His mentor, Mr. Miyagi, says to him, “It ok to lose to your opponent, must not lose to fear!” This same principle applies to trading. Losing trades are a natural part of the process, but allowing fear to drive you out of a trade early is far more detrimental.
The True Key to Success: Discipline and Patience
Trading requires discipline, patience, and a willingness to follow the plan you’ve set out. It’s not about constantly adjusting your trades based on fear or trying to minimize discomfort. The key to success in trading is sticking to the rules, even when things don’t feel comfortable. Fear of loss is normal, but successful traders learn to endure that fear, knowing that over time, the odds will work in their favor if they follow their system.
A key principle that legendary trader Jesse Livermore often emphasized was that “the real money is made by sitting tight.” This doesn’t mean being passive or inactive, but rather staying the course with your well-researched strategy and resisting the urge to cut trades short out of fear. You’ve already done the work upfront to define your risk, reward, and exit points. Your job now is to execute the plan and allow it to unfold over time.
When Should Trailing Stops Be Used?
While trailing stops are generally not recommended for traders who follow a mechanical system, there are exceptions. In highly volatile markets, such as during major news events or sudden price spikes, trailing stops can serve as a safety net to protect profits. However, even in these cases, they should not be the core of your strategy. If you’ve already established fixed targets, price stops, and time stops as part of your systematic approach, there’s no need for trailing stops. Your system has already accounted for risk, and your job is to stick to it.
Conclusion: Trust Your System and Stay the Course
Trailing stops may feel like a way to protect your profits, but in reality, they often serve to amplify fear and doubt. They disrupt the clarity and discipline required for successful trading, leading to missed opportunities and premature exits. Instead of relying on fear-driven strategies, focus on building a mechanical trading system with well-defined entry and exit points. Trust your system, stick to your plan, and let the odds play out over time. Remember, success in trading is about discipline and patience—qualities that will help you become the trader you are capable of being.
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