We verified the effectiveness of trailing stops in EA operation
This article is a survey report on trailing stops that are popular among traders.
A trailing stop is an order method that trails the stop-loss level (stop order) in accordance with market movements.
Since the stop-loss level moves up when the market moves in a positive direction, the trade will be profitable once the stop orders trail up to a certain level.
In discretionary trading, trailing stops are a very popular exit method, and I used them during my discretionary trading days.
However, for discretionary trading where you cannot constantly monitor the market, does trailing stop have any effect in EA automatic trading?
Looking at the GoGoJungle community, many comments from EA developers say that incorporating trailing stops into EAs worsens performance.
I share that view, but I need evidence.
Here is the general idea. The image is a daily chart of EUR/JPY.
Since an uptrend is occurring, if you go long in the direction of the trend, you can expect to take profits at some point.
If you ride the uptrend well, it seems possible to act effectively by leveraging the advantages of trailing stops.
The next image shows the same chart with two moving averages drawn on it.
The short-term moving average period is 10 (red) and the long-term moving average period is 75 (blue).
The dead cross timing is where the white circle is.
If a trailing stop had been set as a stop order, it would probably be hit at the tip of the yellow circle’s wick.
If you hit the stop order and took profits or cut losses, the price then rebounds sharply, so you would have cut the pullback and lost as a result.
I am not a technical analyst or chartist, so I cannot be sure, but I can infer the answer from backtests of EAs.
■ Verification 1
First, I added trailing stop functionality to my main EA, “PerfectOrder GBPJPY,” and ran backtests under various conditions.
However, the performance worsened under all settings.
For EAs like PerfectOrder GBPJPY, trailing stops seem to be negative.
For EAs with superior exit logic, trailing stops appear unnecessary.
■ Verification 2
Next, I tried incorporating trailing stops into the intraday/position-swing EA “MTF Trading USDJPY.”
This EA trades on the USD/JPY five-minute chart using multi-time-frame analysis and moving averages and tends to hold positions for a relatively longer period.
There is a detailed description on the product page.
Backtest results with trailing stops disabled (default setting)
Backtest results with trailing stops enabled
As expected, enabling trailing stops reduces performance again.
■ Verification 3
Next, I implemented trailing stops in the multi-currency analysis EA “Multi Trend USDJPY.”
The result is that only the USD/JPY pair achieved reasonable results with a 1.0 (100 pips) trailing stop, while the performance of GBP/JPY and EUR/JPY worsened.
There is a detailed explanation on the product page.
For USD/JPY, since similar profits could be achieved even with trailing stops disabled, implementing trailing stops did not improve performance.
■ Verification 4
Next, I tested with the scalping EA “Multi Scalping USDJPY.”
This is a high-frequency trading EA with about 1,000 trades per year.
There is a detailed description on the product page.
Backtest results when the stop loss is set to 120 pips
Backtest results when the stop loss is set to 400 pips
Slightly better backtest results were obtained when the stop loss was set to 120 pips.
A 120-pip stop loss means that when the trailing stop trail moves the stop, the stop loss is placed 120 pips away from the current price in the unfavorable direction.
In other words, if the market moves more than 120 pips in a favorable direction after entry, profits are secured.
If the stop loss is set to 400 pips, you will not secure a win unless the market moves 400 pips in your favor after entry.
With a 400-pip setting, the probability of exits due to trailing stops is almost zero.
A detailed analysis of the trade history shows that the 120-pip setting also resulted in more than 99% of trades being closed by the logic rather than by the stop.
That means many trades are closed by the logic before the 120-pip reversal occurs due to high trade frequency, which makes trailing stops ineffective.
Thus, trailing stops do not help at all, and they are meaningless in this context.
■ Conclusion
I added trailing stops to several intraday/position-swing EAs, but they were ineffective.
Nevertheless, trailing stops are very popular as an exit method.
In EA development, if performance does not change, it might be interesting to include trailing stops in an EA anyway.
“Multi Trend USDJPY” and “Multi Scalping USDJPY” have trailing stops enabled by default settings.
In the future, trailing stops are unlikely to become the central focus of EA development.
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