A technical indicator that attempts to provide stop loss levels for both a long and short position.
Overview
The Trailing Stoploss Levels (Volatility-Based) indicator is based from Chande & Kroll’s “The New Technical Trader”, p.167, ‘Volatility-Based Trailing Stops’.
The Trailing Stoploss Levels (Volatility-Based) indicator “trails” (or follows) above and below price based on its position respective to the price. It can be set to trail above or below prices based on volatility. Volatility-related settings are available to allow the user fine-tuning of the indicator.
The Trailing Stop Loss Levels in the GBP/USD Daily Chart on 3/22/2011
Source: VT Trader
Interpretation
Trailing Stoploss levels, either volatility-based or pip-based, have become very popular with traders as a non-emotional exit strategy for their trading methodology. Trailing Stoplosses help to remove the emotion usually involved with exiting trades thereby helping the user to better control their risk.
In a long position, the trailing stoploss level trails (or follows) below price and catches itself higher as prices rise. Conversely, in a short position, the trailing stoploss level trails (or follows) above price and ratches itself lower as prices fall. However, if price retreats back towards the trailing stoploss level the trailing stoploss level will remain at its previous level never “backing away” from price thus helping to protect potential profits or limit loss. A long trade exit is signaled when price crosses back below the trailing stoploss level. A short trade exit is signaled when price crosses back above the trailing stoploss level.
