Trailing stop loss = doomed to fail??

[TheeeDragon]

new trader (but have a math background)
buying options (paper money)
Active Trader using the buying template is TRG with a bracket
(setting the upper limit is arbitrary (ie why limit top potential??)
set lower to trailing stop = at 10%
scenarios - ALL worked as desired
I click the Buy Ask Button (which I added)
and all showed initial profits (ie I picked well )
but often had losses at the close position??
I thought how is this possible?
So I did the math and examined down to the pennies
(Disregarding differences between bid and ask)
Found the problem: (and looking for a solution)
I had initially inferred that the trailing loss of minus 10% implied that if my bid price rolled back more than 10%
... then I thought that I was preserving 90% of my profit
However, clearly not the case
It's 10% is of the total bid price, not the difference between the current bid price and the open price (ie current profit)
So with a 10% trailing stop
If the increase in value is less than 10%, and we have any rollback in the bid price
The position closes with a negative value every time
Example
The purchase price $10, and the value increases to $11
And it rolls back.,
Keep rolling for 10% of $11 (ie $1.1)
And I exit at $9.9 as opposed to the $10.9 that I expected
I expected the trailing stop to preserve profit
Which it will do only if the increase value exceeds the percentage of the trailing stop number
Yes, I can change the trailing stop to a hard number, but then I have to fine-tune it for each of the options that I'm buying
And some options cost $.05, some cost $5, some cost $20, etc/
That's a lot of work
In summary:
Need help determining how to protect profit when it's less than the rollback percent??
Thanks for listening

 

[mashume]

There are several things going on. The first you need to remember is that your trailing order is triggered at the target, and unless you've placed a trail stop, you're order is a market order and filled at the first available market price (not your target price necessarily). This is per this page:
https://tlc.thinkorswim.com/center/howToTos/thinkManual/Trade/Order-Entry-Tools/Order-Types

An order that is entered with a stop parameter that moves in lockstep (“trails”)—either by a dollar amount or percentage—with the price of the instrument. Once the stop (activation) price is reached, the trailing order becomes a market order, or the trailing stop limit order becomes a limit order. Both are accepted only for stocks that trade on NASDAQ, NYSE, and AMEX.

The second thing going on is that your 10% is not 10% of your gain. It is the original 10% of the purchase price, as you have experienced. When you bought at $10.00 and it climbs to $11.00 and then falls $1.00 (10% of your original $10.00) it will trigger your order and sell at the first available market price, often $9.99 or less -- greater than your 10%, but remember that's just the trigger point. Your $10.9 sale represents a %1 stop. I generally prefer to work in real dollar amounts (or ticks) rather than in percentages as it is a lot more concrete to my mind.

As for preserving gains, you can either ride the sell button and take what you want, or set acceptable risk:reward prices with an OCO order where you might set your loss at $0.50 and your gain target at $2.00 (for a 4:1 RR ratio). If you make your target more than 25% of the time, you will make money. If you set your R:R at 1:1 you must win more than 50% of the time. R:R like 100:1 will keep you in the green theoretically, but your draw down may be unacceptable and your account blows up before your strategy hits.

The thing to do is realize that losses happen and sticking to your trading plan is the only path forward. You will learn to set targets and risks that work for you (look up recommend levels - often between 1% and 2% of account value risked per trade).

Also study your instruments to decide if your targets (or stops) are within (or too close) to normal volatility. It does no good to place a stop so close that it stops out before the instrument is allowed to move by the market forces. Neither is it good to set your target price so high that the market is unable to move that far except by extreme volatility (don't think too long on how much you'd have made shorting /ES when the COVID news first broke or being long on /CL when the news of the Russian invasion of Ukraine broke -- us mere mortals cannot know of such things in advance).

Good luck and happy trading.

-mashume

 

[somefool]

I might recommend creating a template in the Orders window instead of using brackets in the Active Trader window. The advantage is you can create two different (for example) 100 share stop losses for the same 100 share buy order. At the beginning of the trade, to keep a tight stop you could create a regular 100 share stop order of -.10%. This way if price immediately swings against you, the stop will result in a very small loss. Your second stop order can be a wider 100 share trailing stop of -10%. If you guess right and the security rockets higher, your trailing stop will move up and up until it rises above your -.10% static stop loss. To actually send a Custom Order after you make such a template, you can do so in a Chart window by right-clicking > Buy Custom. This is more clicks than placing an order in the Active Trader window, but you have a far more intelligent and valuable stop loss. When you are creating a template in the Orders window you can of course also set a Study to trigger your custom order (instead of right-clicking a chart).

Note that I have only done this 'trailing stop exceeds static stop' order a few times, but it seemed to work. I was able to watch my orders on the chart and see the trailing stop tick higher and higher, eventually moving above the static stop. Then when the trailing stop was finally taken out the static stop loss order was automatically cancelled.