Trailing Stop Loss Strategy: 6 Unique Strategies Including Automation Ideas

Implementing a trailing stop loss strategy is brilliant for those traders who have trend following strategies, looking for excellent risk reward trading opportunities. 

This article explores several trailing stop loss strategies, so you can pick and choose the perfect one for your trend following entry techniques.

Also, we will be covering a concept around when to set your initial stop to break even, which can be an absolute game changer for many traders.

We will also provide examples using charts and showcase some automated tools you can use to really power up your exits in 2025.

Basics of Trailing Stop Loss - What is a Trailing Stop Loss?

A trailing stop loss is a dynamic order that 'trails' a trade as it moves in a profitable direction, automatically adjusting to lock in profits and limit losses. 

Unlike a fixed stop loss, which remains static, a trailing stop loss moves with the market price, offering a more flexible approach to risk management.

The good news is you can apply the strategies mentioned here across Forex, indices, Commodities, shares, cryptocurrencies and any financial instrument you can think of.

Fixed vs. Trailing Stop Loss

While a fixed stop loss sets a hard exit point regardless of market conditions, a trailing stop loss provides the flexibility to capitalise on market movements. 

There is nothing worse than riding a successful trade up 5-10%, only to see it reverse and take you out at a stop loss.

Your trailing stop is designed to eliminate those positions moving nicely in your favour, and if a pullback occurs, you can lock in the portion that is left as your profit.

Initial Stop vs Trailing Stop Loss

When it comes to Forex trading, understanding the distinction between an initial stop and a trailing stop loss is crucial for effective risk management and getting clear on your risk reward levels.

The Role of the Initial Stop

The initial stop loss is set at the time of entering the trade. Its primary function is to limit the potential loss on a position. 

This stop loss point is determined based on the trader's risk tolerance and market analysis at the time of trade entry. 

Some common examples of an initial stop loss are:

• Below a recent swing low level (for long positions)
• A set percentage below your entry
• Below a clear support level
• A specific number of points, pips or dollars, depending on what market you are trading.

The key characteristic of an initial stop loss is its static nature – it does not move lower as the market moves. 

It's a safeguard, ensuring if the market moves against your position right after entry, your losses are capped to a predetermined amount. 

This initial stop loss level should not exceed 1-2% of your capital on any one trade.

The more capital you have, the lower your risk per trade should be. Many fund managers and professional traders risk 0.5% or less per trade.

Transition to Break-Even

A significant aspect of managing an initial stop is the concept of moving it to break-even. This strategy is employed when the market moves favourably by a sufficient margin from the entry point. 

For instance, if a trader risks 30 pips on a Forex trade and the market moves 30 pips in their favour, the initial stop loss can be adjusted to the entry point, effectively making the trade risk-free. 

When the Trailing Stop Loss Takes Over

Once the initial stop is moved to break-even and the market continues to move in a profitable direction, the trailing stop loss becomes the primary tool for managing the trade. 

Unlike the initial stop, the trailing stop loss is dynamic. 

It follows the price as it moves in the trader's favour, trailing behind by a set distance or percentage. 

This allows traders to secure a portion of their unrealised profits, ensuring if the market suddenly reverses, the gains are not entirely lost.

Securing Profits in Market Reversals

The beauty of the trailing stop loss lies in its ability to adapt to changing market conditions. As the market continues to move in favour of the trade, the trailing stop incrementally locks in more profit.

If the market turns, the trailing stop loss acts as a net, capturing the gains made up to that point. 

This ensures a profitable trade does not turn into a losing one, a critical aspect of long-term trading success.

Benefits of Using Trailing Stop Loss - Protecting Gains and Managing Risks

The primary advantage of a trailing stop loss is its ability to protect accumulated profits while still leaving room for further gains. 

It ensures a trade remains profitable by closing the position if the market turns, thereby minimising potential losses.

Implementing Trailing Stop Losses: 6 Key Methods to Choose From

ATR Trailing Stop

The Average True Range (ATR) was introduced by J. Welles Wilder in his 1978 seminal work, "New Concepts In Technical Trading Systems." This indicator has since become a fundamental tool in technical analysis, particularly in the realm of risk management strategies like the ATR trailing stop loss.

While the ATR stop can be calculated from the high, low, or closing price of a security, most traders prefer to base it on the closing price. 

This approach tends to provide a more consistent measure of market volatility, as the closing price is often considered the most significant in a trading day.

Setting a stop within 1 ATR of the current price can significantly increase the risk of being 'whipsawed' out of a position.

A whipsaw occurs when a trader is stopped out of a trade due to a short-term fluctuation in price, only to see the market move back in their favour shortly thereafter.

1, 2 or 3 ATRs?

For traders focusing on short-term momentum plays, a trailing stop set between 1.5 and 2 ATRs from the current price can offer a balance between protecting gains and allowing enough room for the trade to breathe.

Conversely, traders aiming to capture larger, trending movements may opt for a wider trailing stop, typically between 2.5 to 3 ATRs. 

This broader range allows the position more space to withstand the ebbs and flows of the market, which is crucial in trend-following strategies where the objective is to stay in the trade for longer periods to capture substantial moves.

Chart courtesy of TradingView

The versatility of the ATR trailing stop loss has led to its integration into popular trading platforms like MT4, MT5, and TradingView. 

Its application is not limited to Forex trading; stock traders, for example, have incorporated ATR stops into platforms like Metastock, coding the tool to fit various market conditions and individual trading styles.

Lowest Low Value and Highest High Value Trailing Stop Loss

In technical trading, the use of Lowest Low Value (LLV) and Highest High Value (HHV) trailing stops is a strategy using a defined lookback period to set your stop loss levels for long and short positions.

LLV Trailing Stops in Long Trades

LLV is utilised in long trade scenarios. The mechanism involves counting back to find the lowest low value over a specified number of candlesticks - typically 3, 5, 7, 10, or 20. 

The choice of the number of bars depends on whether you are looking for a short term stop or you prefer to give your profits the greatest chance to run.

For a practical application in long trades, one might count back to find the lowest low value over 5 bars. 

The stop loss is then placed just below (1 tick) the low of the lowest candle counting back 5 days. 

This technique allows traders to protect their positions by ensuring the stop loss is set at a level that has historically supported the price.

Highest High Value (HHV) Trailing Stops in Short Trades

Conversely, HHV is applied in short trade setups. It involves identifying the highest high value over a chosen number of bars, similar to the count used in LLV.

In short trades, the process involves counting back to find the highest high value over an interval (e.g., 3, 5, 7, 10 or 20 bars) and setting the trailing stop just above the high of the highest candle. 

This method ensures the stop loss is positioned at a point where the market has previously seen short-term resistance.

Choosing the Right Count Back Period - Short-Term Trading: 3-5 Day Count Back

Traders focusing on shorter timeframes often prefer a 3-5 day LLV count back. 

This shorter interval is ideal for those who aim to lock in profits quickly and minimise the amount of open profit given back. 

It suits a more aggressive trading style, where the goal is to capture profits while the momentum is strong, followed by a small pullback.

Long-Term Trading: 7-20 Day Count Back

For trend followers, a longer count back period, such as 7-20 days, is preferable. This extended interval allows traders to stay in trades longer, thereby taking advantage of larger trending movements. 

While this approach may involve giving back more open profit when the market turns, it aligns with the philosophy of riding out trends for more significant potential gains.

The LLV and HHV trailing stop loss methods provide traders with a flexible and historical data-driven approach to managing trades. 

By selecting the appropriate count back period based on their trading style and objectives, traders can effectively balance the twin goals of capitalising on profitable market movements and minimising downside risk.

Parabolic SAR Trailing Stop Loss Strategy

The Parabolic SAR (Stop and Reverse) indicator stands out as one of the most straightforward methods for setting trailing stop losses in Forex trading. 

Developed by J. Welles Wilder Jr., this tool is designed for simplicity and efficiency, particularly on platforms like MT4/MT5, where it visually displays trailing stop exit levels, making it user-friendly for traders of all levels.

Applying the Parabolic SAR indicator on trading platforms such as MT4 and MT5 is a seamless process. 

Once added to a chart, the indicator plots points or dots on the price chart that signify potential exit points for trailing stops. 

These points are easily interpretable, providing clear signals for adjusting stop loss levels, whether you're in a long or short position.

One of the Parabolic SAR's key advantages is its versatility. It is equally effective for both long and short positions, adjusting its points based on the price direction. 

For long positions, the dots are placed below the price, moving upward as the price increases, and for short positions, the dots appear above the price, descending as the price falls.

The Parabolic SAR indicator is best leveraged in trending markets. 

Its design inherently favours situations where a clear direction is present, as its calculations are based on price movement and velocity, making it less effective in sideways or ranging markets.

Aligning the Parabolic SAR with a robust trend-following entry signal can significantly enhance a trader's potential opportunity, allowing for maximized gains in strong trends while providing a systematic method for exiting positions when the trend starts to reverse.

Moving Average Crossover

This strategy involves setting a trailing stop based on the crossing of moving averages, a common technical analysis technique.

Moving averages are foundational in technical analysis, often marking a trader's first foray into market indicators. 

Commonly, the initial strategy or Expert Advisor coded by beginners is the moving average crossover. 

For instance, applying 5 and 20 period moving averages can be particularly effective in strong trending markets, striking a balance between responsiveness and trend confirmation. 

You can see the example of the moving average crossover trailing stop applied to the Nasdaq100 index, which has been trending strongly since the start of January 2025.

However, it's important to note the inherent downside of moving averages: their lagging nature. 

This means you will never be able to get out at the top of the market, and will definitely give back open profits at the end of the trend.

Automating Trailing Stops with Expert Advisors

Automating trading strategies, including the use of trailing stop losses, will make your trading life so much easier. Plus, if you live in Australia, you may like to sleep while the Forex markets are active.

Using an EA for your exits allows you to set and forget and have the EA close your positions based on your preferred exit strategy.

Expert Advisors (EAs) with stop loss and trailing stop loss features are available on mql5.com.

The more advanced EAs have 5-7 different trailing stop losses you can apply, and all is handled automatically, including moving your stops to breakeven.

For example, the Trade Assistant Expert Advisors has 7 trailing stops you can use.

The ACY Long Short MA Stop Loss Script - Exclusive Tool for ACY Clients

ACY Securities offers an exclusive tool for its clients - the ACY Long Short MA Stop Loss Script. 

This script is available for free to clients who open a trading account and download the ACY MT4 platform.

How It Works

The ACY script is designed to automatically adjust stop losses based on the long and short moving average parameters. 

This tool simplifies the process of applying trailing stop loss strategies, making it accessible even for traders new to Forex markets.

Benefits of the ACY Script

By using this script, ACY clients can enjoy a more streamlined and efficient trading experience. 

The tool's integration into the ACY MT4 platform ensures seamless functionality and compatibility, adding value to the overall trading experience offered by ACY Securities.

The Psychological Impact of Trailing Stop Loss - Emotional Control in Trading

One of the less discussed but crucial aspects of using trailing stop losses is the psychological impact. 

Trading, by nature, involves a significant emotional component. The use of trailing stop losses helps in maintaining a level of emotional detachment by setting predefined exit points. 

This reduces the temptation to make impulsive decisions based on fear or greed.

Importance of Discipline and Avoiding Common Mistakes

The discipline enforced by a trailing stop loss strategy is beneficial for long-term trading success. It encourages traders to stick to their trading plan and not deviate due to short-term market fluctuations or emotional biases.

Common mistakes in using trailing stop losses include setting them too tight, which can lead to premature exit from potentially profitable trades, or too loose, which might negate the purpose of minimizing losses.

Best practices involve understanding the specific market conditions and adjusting the trailing stop loss parameters accordingly. 

For instance, in a highly volatile market (use the ATR indicator to understand how volatile a Forex pair is), wider stops might be necessary to avoid being stopped out by normal market fluctuations.

Conclusion - Summary of Trailing Stop Loss Strategies

Trailing stop losses are a dynamic and effective tool for managing risk and protecting profits in Forex trading. 

Now you have unlocked the potential of the trailing stop loss strategy, it's time to put your newfound knowledge into action with ACY Securities. 

Open a live trading account with just $50, benefiting from ultra-competitive spreads starting at 0.0 pips. 

Choose from the versatile MT4 or MT5 trading platforms, and experience our best trading conditions on offer. Or grab a free demo account and test your trading ideas.

Still looking for more trading strategies? Take advantage of our industry-leading, free trading webinars, where you'll master an array of strategies across all market conditions.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.