I have not yet seen a backtest, where the breakeven stop did do any good. If you decide to use a trailing stop for an automated strategy, then it should be based on volatility and not on the entry price for the position. After all, most of the other market participants entered their positions at different prices, and the current entry price has little to do with the overall market.
it is just a psychological thing ...
The break even move is more of a psychological trick used by discretionary traders. Another rule known among heavy weight traders is "Let your profits run!". Once you have exited half your position and moved your stop to break even, you are playing with the money of the market, it is not yours. With the small profit made on the first half of the position, you paid for your trading cost and there is no more risk of a loss (the risk of technical failure remains, but this is very low). It is now easier to let the profits run, because the risk is gone.
Also once the stop has been moved to breakeven, it is no more necessary to do the permanent monitoring of the position, and that time can be spent on new trade setups.
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In my opinion stops should be moved based on information that the market is giving you. Whether it be price action, volatility, order flow, etc. Choose your poison. But moving a stop to breakeven just because you're up X ticks makes no sense because the market neither knows nor cares where you entered.
As Fait Tails mentioned, moving a stop to breakeven is largely a psychological trick we play on our minds and has nothing to do with good trading. Our minds are funny things. We'll let a trade take us out for a full stop, but as soon as we have a little profit we try and force our will on the market and settle for smaller profits. We should be giving winners the space they need to play out.
Markets don't move in straight lines. If we enter at 100 with a target of 200, the market will almost never spike up to reach our target in one swing (except on news occasionally). Markets oscillate and move in swings. They do this fractally on all time frames simultaneously. Don't get nervous when the market comes back to test your entry, realize that it is a natural part of how markets move and that if our original trade premise is still valid there is no reason to exit.
This is something that most people know to be true on some level but still battle to leave their stop unchanged in the heat of battle. The only thing I found to work was to prove it to myself through forward testing because knowing this to be true theoretically and seeing it in action through months of forward testing were two very different things. I forward tested a breakeven stop vs a price action stop over several months. The same trades, the same targets. Simply recording the results of a breakeven stop vs a price action based trailing stop. The results were beyond clear. I made almost 10 times the profit using a price action stop.
But until you actually test this for yourself and see the results in black and white, it is very difficult psychologically to leave your stop in place while in the heat of battle.
You donít trade the markets; you only trade your beliefs about the markets.
- Van K Tharp
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After your first target is hit.
You can always jump back in at or near the same price.
However, I often don't get back in at the same price, I may even get a better price.
Plus I've already locked in a profit, so my initial risk now is lower than it was before.
Entry timing based on price is one part of my strategy.
The other part is trade/risk management techniques like this one.
Strategy ≥ Money
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