Many traders believe that using trailing stops always locks in more profit, assuming that trailing stops automatically guarantee that they will capture the maximum possible move of a trade. While trailing stops are a powerful tool for protecting profits and allowing trades to run, they don’t always result in larger profits. In certain market conditions, trailing stops can actually cut profits short or result in early exits, especially in volatile or choppy markets.

The belief that using trailing stops always locks in more profit overlooks the nuances of market behaviour and the specific conditions under which trailing stops work best.

Why Traders Believe Trailing Stops Guarantee More Profit

Several reasons contribute to the belief that trailing stops always lock in profits:

• Automation and simplicity: Trailing stops are a hands-off, automatic way to protect profits as a trade moves in your favour, making them an attractive option for many traders.
• The desire for large gains: Traders who focus on capturing as much of a move as possible may feel that trailing stops are the perfect solution to avoid leaving profits on the table.
• Reduced emotional interference: Trailing stops can help traders avoid making impulsive decisions or cutting winning trades too early due to fear or greed.

While these benefits are valid, they can also create unrealistic expectations of how trailing stops perform in all market conditions.

Why Trailing Stops Don’t Always Lock in More Profit

There are several scenarios where trailing stops can lead to less profit or even a loss:

• Excessive volatility: In highly volatile markets, a trailing stop may be triggered prematurely due to price fluctuations, causing an early exit while the trend could have continued.
• Choppy markets: In sideways or range-bound markets, trailing stops often get hit as price moves back and forth within a range, cutting off trades before they have the chance to reach full profit potential.
• Incorrect trailing stop distance: Setting the trailing stop too close can lead to early exits during natural price retracements. On the other hand, setting it too far can reduce the effectiveness of the protection, as it allows for larger swings in price before the stop is triggered.
• Missed opportunities: If the price retraces slightly, activating the trailing stop, the trader might miss the opportunity for the price to resume in the original direction after the retracement.

Thus, while trailing stops are useful, they are not a guarantee of more profit in all cases.

How to Use Trailing Stops Effectively

To maximise the benefits of trailing stops, they should be used with thoughtful consideration of market conditions and trade setup:

• Use appropriate stop distance: Adjust trailing stops according to market volatility and timeframe. On higher timeframes, you may need wider trailing stops, while on shorter timeframes, narrower stops may work better.
• Market type consideration: In trending markets, trailing stops can help lock in profits as the trend continues. In range-bound or volatile markets, however, avoid using trailing stops or apply them cautiously.
• Combine with other indicators: Pair trailing stops with other tools, like moving averages or price action patterns, to confirm the continuation of a trend before adjusting the stop.
• Consider a break-even or partial exit approach: Instead of always relying on trailing stops to secure all profits, consider moving stops to breakeven at key levels or partially exiting positions at certain profit targets, letting the rest of the position run.

Adapting trailing stop usage to the specific market environment maximises their effectiveness.

Examples of Trailing Stops Not Locking in Profits

• Volatile news event: A trade moves in your favour, but a major news release causes a sharp reversal, triggering the trailing stop prematurely before the price resumes in your favour.
• Choppy market conditions: A swing trade that looks promising in a trending market gets stopped out by minor retracements, only to resume in the intended direction later.
• Incorrect distance: A tight trailing stop is hit due to a small pullback, while the price eventually moves in your favour for a much larger gain.

Each example shows how, when used improperly or in the wrong market conditions, trailing stops can hinder potential profits.

Conclusion

It is completely false to believe that using trailing stops always locks in more profit. While trailing stops are a useful tool for protecting gains and letting winning trades run, they are not infallible. In volatile or choppy markets, trailing stops can cut profits short, leading to premature exits. To use trailing stops effectively, traders must adapt the stop distance to market conditions, timeframes, and overall strategy, while considering them as part of a broader risk management plan.

To learn how to use trailing stops effectively and incorporate them into a comprehensive trading strategy, enrol in our expertly designed Trading Courses today.