Have you ever set a trailing stop loss?
Is it even a good idea?
Do you know its win rate?
Do you know if it increases or lowers your profit?
Well, I took 100 trades with a trailing stop loss to find its win rate, and to see if it increases or decreases the profit.
In a previous video, I tested the MACD strategy on the Bitcoin USD 30-minute timeframe.
It got a 62% win rate with a fixed 1.5-to-1 reward-risk ratio.
It made around 55% profit on the trading account with 1% risk per trade.
So, I’m going to take those same 100 trades in the same market structure.
But this time, I’m going to use a trailing stop loss.
Then, we will compare whether the win rate and profit go up or down.
If the profit increases, we should use a trailing stop loss.
If the profit decreases, we shouldn’t use a trailing stop loss all the time.
The MACD strategy I tested previously is a trend-trading strategy.
We use the 200-period moving average for trend direction.
The price above it is an uptrend, and below it is a downtrend.
We only buy in an uptrend when the MACD line crosses above the signal line, and this crossover happens below the MACD’s zero line.
We set the initial stop loss below the pullback.
We only sell in a downtrend when the MACD line crosses below the signal line, and this crossover happens above the MACD’s zero line.
The initial stop loss goes above the pullback of the trend.
Now, to convert this to a trailing stop loss strategy, I’m going to use the Parabolic SAR indicator.
I have used this indicator to trail stop losses in my own trading journey as well.
This Parabolic SAR indicator shows dots above and below the price movement.
These dots are very good at following the price with a gap.
So, we will trail the stop loss using these dots.
I’ll take a long trade with the MACD setup.
Initially, I’ll set the stop loss below the pullback.
And as the price moves up, I will trail the stop loss using the dots.
In a short setup, after setting the stop loss above the pullback initially, I will trail the stop loss above the dots as the price moves down.
Since we are trailing the stop loss, we won’t use a fixed profit target.
We will keep trailing until the price reverses and hits our trailing stop loss.
This way, we can book big profits.
I took 100 trades like this, and here’s what happened.
The normal fixed-profit target strategy had a 62% win rate.
But the trailing stop loss in that same market structure only got a 46% win rate.
The normal fixed-profit target strategy made around 55% profit.
But the trailing stop loss only made around 35% profit.
So, it not only got a lower win rate, but also made a lower profit.
Does this mean a trailing stop loss sucks?
Well, hold on.
I have tested another strategy before: an RSI indicator strategy.
It also had a 46% win rate with a fixed 1.5-to-1 reward-risk ratio.
But that strategy only made around 15% profit on the account.
In that comparison, even though the win rate with the trailing stop loss was low, the profit was way higher.
However, it kind of sucks compared to the normal MACD strategy’s fixed profit and stop-loss targets.
But why did this happen?
You see, in a normal trend setup, we are trading the long-term trend.
We don’t care what happens in the short term, as long as it doesn’t trigger our stop loss.
But a trailing stop loss keeps the stop loss closer to the current price.
In a long-term uptrend, the short-term price moves up and down a lot.
This short-term downward movement triggers the closer trailing stop loss, resulting in an early exit.
Because of that, the win rate dropped.
And even though the trailing stop loss captured some really big profits, most of the time it exited early and booked small profits.
That resulted in a lower profit overall.
So, in a normal long-term trending market, using a trailing stop loss on every trade is not a good idea.
But does that mean a trailing stop loss is completely bad?
Well, no.
I use a trailing stop loss when I want to capture short-term momentum, especially on the smaller timeframes.
If I want to stay in the trade as long as the strong short-term momentum continues, I like to trail the stop loss.
If the price makes a big move, I book a big profit.
If momentum disappears quickly, a trailing stop loss helps me exit as soon as the momentum disappears.
But in long-term trend setups, I don’t care about short-term momentum that much.
I’m usually trying to capture the long-term trend there.
In those setups, I usually don’t use a trailing stop loss.
So, you can do a similar thing.
Thanks for watching!