Trailing stop mechanics: what exactly do you trail?

FTC Community TeamStaff17 Sept 202615 views

Trailing sounds simple; the mechanics are not. A fixed pip trail ignores volatility; a swing-based trail gives back different amounts in different regimes; a moving-average trail lags by design.

Trailing stop mechanics: what exactly do you trail? — pip movement diagram — How a pip moves the exchange rate

Describe your trail:

the reference you trail (swing, MA, ATR, fixed pips)
how often you update it
the regime where your trail underperforms

Trailing stop mechanics: what exactly do you trail? — support and resistance diagram — Price bouncing between support and resistance

The ATR guide gives the volatility-aware version.

Background: Average true range (ATR): measuring volatility and setting stops

ATR shows how far a pair typically moves in a period. Here is how true range is calculated, and how traders use ATR to place stops and size positions.

How is ATR calculated?

True range for each period is the largest of high minus low, high minus the previous close, and low minus the previous close, ignoring signs. ATR averages true range, typically over 14 periods with Wilder's smoothing.

What ATR multiple should I use for a stop-loss?

Many traders use 1.5 to 2 times ATR, but there is no correct number. Wider stops are hit less often and need a smaller position to keep the same amount of money at risk.

Read the full guide

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