Trailing Stops Based on Break-Even Costs, Moral Expectation, and Net Exposure
Summary
The article explains trailing stops as position-management tools and develops several variants. It first sets practical stop boundaries: the broker's minimum stop distance forms an outer constraint, while a break-even floor should account for commission, swap, point value, and adverse slippage. A candidate stop must remain within those bounds and improve on the existing stop. The author then discusses using statistical price levels, moral expectation to balance possible gains and losses, and a virtual stop for a group of long and short positions weighted by their volumes.
Illustrative tests use randomly directed and sized EURUSD positions, comparing trailing-stop timeframes and the presence of take profit. The reported outcomes change substantially with timeframe; adding take profit shifts results, and moral-expectation management performs somewhat worse than the simple variant in the presented comparison. These are not tests of a complete entry strategy: positions were randomized and some remained open at the test end. The article explicitly cautions that a trailing stop cannot make an inadequate strategy profitable or guarantee break-even results.
Key ideas
- A viable stop should respect broker distance rules and account for trading costs when defining break-even.
- Each stop update should be within allowed bounds and improve the existing stop level.
- Moral expectation offers one way to choose stop and target levels while accounting for outcome probabilities.
- A virtual stop can manage multiple positions using their net directional volume and weighted closing prices.
- The reported tests use random positions and show sensitivity to timeframe, so they do not validate an entry strategy.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.