Any reason NOT to use trailing stop?

[David Latapie]

Hi,

The more I read about trailing stop orders, the more I like it. The main issue is that most exchanges don't support it (out of kraken, bitfinex and, once volume reaches a reasonable level, swaphole.com).

I din't see much reason no to use it (when it is available). Here my list:
1. Extra fees (kraken doesn't charge extra AFAIK, but swaphole does - bitfinex I don't know)
2. Overconfidence, feeling of complete security (although I don't think this is really an issue)
3. Potential miss of money in case of a quick rebound, like the picture above (trailing stop to sell will miss the second line - it of course depends on the percentage on your trailing stop). This also holds true for a trailing stop to buy, just reverse the chart)
4. Generalisation of trailing stop may lead to lower volatility (but this is not something, as an individual, we can do something about in one way or another)



Do you validate these reasons? Do you seen any other reasons not to use trailing stop?

Thank you.

Edit: some other readings regarding trailing stops which corroborate my opinion (I hope I avoided confirmation bias)

http://moneymorning.com/2013/11/22/trailing-stops-explained-and-why-you-need-them/
Stop-loss orders enable you to cut your losses and walk away from a stock before it swallows your savings in its downward spiral.

Trailing stops go a step further - not only do they safeguard against excessive loss, but they also help preserve your profits.

Sure, it's true that if you are diligent in using stop-loss orders, you can be "stopped out" of what could end up being a very good stock - if the stock takes a temporary nose-dive. But you can always buy back in (buy setting up trailing stop to by, for instance.


http://www.investopedia.com/articles/trading/08/trailing-stop-loss.asp
An example of this concept is to have a stop loss set at 2% and the trailing stop at 2.5%. As the price increases, the trailing stop will surpass the fixed stop loss, making it redundant or obsolete. Any further price increases will mean further minimizing potential losses with each upward price tick. Initially, the stock was given some flexibility with the staggered values, so it could establish a level of support. By doing this, you can trail a stock's price movements without getting stopped early in the game, and allow for some price fluctuation as the stock finds support and momentum. Be sure to cancel your original stop loss when the trailing stop surpasses it.

Market makers are fully aware of any stop losses that you place with your broker and can force a whipsaw in the price, bumping you out of your position and then running the price right back up again. If you like the stock, you can always buy it back.


http://themomentumalert.com/tag/trailing-stop-strategies
How far behind should you place the trailing stop?
For longer-term investors, 25% is about right.
For short-term traders, 15% is closer to ideal.

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A trailing stop by definition 'trails' the market price and is used to either limit loss or lock in profits during a trending period.

Your graphic shows an upwards trend and an exit 'taking profit' once a certain price point or target is reached that is not an example of a trailing stop that is a take profit.

I have used trailing stops extensively in trading and they are very effective if you are able to chose the right type of trailing stop for the market you are trading and also match it to the outcome you are looking for. By that I mean a trailing stop for a trade outcome of a few days will be different to a trailing stop for a trade outcome of a few weeks or months. There are many ways of calculating what type of trailing stop to use. I had a preference for a stop that took into account the volatility of the product being traded and enabled you to stay away from 'average' price fluctuations whilst following the overall trend. You always have to prepare however to be stopped out of a position and then see the market  carry on without you, no calculated stop is perfect, but overtime they allow you to remove emotions from your decision making and exit mechanically.

Most BTC exchanges are are new and not sophisticated in the type of trading 'tools' they offer (yet) as Bitcoin evolves this will change and sophistication will increase. That is why the exchanges you mention don't offer such things as trailing stops. You can however do your own trailing stop on a piece of paper or spreadsheet and manually update it and take appropriate action when price moves against you.

You may find this resource interesting http://www.incrediblecharts.com/indicators/atr_average_true_range_trailing_stops.php

[David Latapie]

Hi and thank you for your answer.

Your graphic shows an upwards trend and an exit 'taking profit' once a certain price point or target is reached that is not an example of a trailing stop that is a take profit.

What I wanted to show with this graphic is that by choosing to small of a percentage, you could get less profits than possible - this is frustrating but you still don't lose money.

but overtime they allow you to remove emotions from your decision making and exit mechanically.

Exactly. I'm reading to win less, as long as I can get the emotion out of the equation.

Most BTC exchanges are are new and not sophisticated in the type of trading 'tools' they offer (yet) as Bitcoin evolves this will change and sophistication will increase. That is why the exchanges you mention don't offer such things as trailing stops. You can however do your own trailing stop on a piece of paper or spreadsheet and manually update it and take appropriate action when price moves against you.

I a world where 100% of my attention would be focused on any crypto I invest in (which is esssentially impossible), yes. But many cryptos, sleeping, having a life... Paper is not a solution, at least for me. Robots required.

You may find this resource interesting http://www.incrediblecharts.com/indicators/atr_average_true_range_trailing_stops.php

Interesting, as long as you have the right chart (most cryptos don't)

Besides, I contacted Kraken and below is a part of their answer that particularly stroke me:

Just using a trailing stop is a pretty simplistic trading strategy and it's unlikely to yield a profit without careful study and experience behind it. If your plan is to just put on a trailing stop at X%, then buy back later for a profit after it triggers, then put on another trailing stop to repeat the scenario, this strategy will almost certainly lose you money if you follow it mechanically under all market conditions.

Granted, maybe what is right for major league currencies (ltc, btc plus fiat, that is Kraken's) might not hold true for minor league (e.g. Mintpal/Cryptsy). But still, that turned me somehow off on trailing stop. If I just need to tweak the percentage, this is OK, but if it is more than than, well...