Trailing stop should not react to local extrema

Hi there.
Consider the below sketch:

Assume the desired direction is positive (i.e. a long position). As the price moves up towards the first peak, the stop-loss (bottom of the red indicator) follows, as expected. When the price starts coming down, the stop-loss remains static, again as expected.
BUT, when the price makes a very slight local maximum, which is what ALWAYS happens in markets, the stop-loss threshold gets updated! This is dangerous! This makes the trailing stop practically go up and down freely. I have already lost money due to this behavior at least a couple of times.

I suggest a better implementation, which realizes the main idea behind a trailing stop, would be this: “The stop-loss threshold only moves in the desired direction, AND NEVER IN THE OPPOSITE DIRECTION, whatsoever”.
I think this solves the problem and is what everybody needs.


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Surely once your stop/loss kicks in, your position is closed so any new buy would have a new stop loss? Your stop loss also needs tapered for potential reentry too. How long a drop before you buy back, or do you buy back the moment you see an up tick?

Thanks @Dougal1984.
I honestly didn’t quite understand your questions. Perhaps because I have not been clear in my message?
I’m talking about a single open position. May be it is the term stop-loss that I misused? By it I refer to where the position automatically ends due to a set trailing stop; In the sketch above, the position should be automatically closed when it hits the bottom of the red indicator on the left. But since the trailing stop mechanism keeps following the price curve (e.g. the red indicator on the right), it does not. The threshold keeps getting updated and follows the price downwards, as long as there are small fluctuations along the way – which is always the case!

What you want is a trailing stop loss. You need to be weary as I think 212 graphs Ask when it works on bid, or should do.

Here’s a perhaps better plot:

Expected stop threshold: bottom of 1
The threshold that wrongly kicks in: bottom of 2

It also doesn’t guarantee execution. The market sell goes out when the trailing floor price is triggered.

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Never seen this. Trailing stop is only updated, when you change the order. If you set a trailing stop, it will move in the direction you trade and will close when the level is hit.

Here, I just recorded an exemplar position. It’s a long (buy) position. I set the Trailing Stop, confirmed, and now reopened to monitor what’s happening.

It’s not the best example, but you can clearly see that the threshold price goes in both directions!!!

I believe what you are seeing here is just a live indication of what 100.00 from the current stock price is, should you wish to adjust the trailing stop.

If you have already locked in your trailing stop, you will be unaffected by this fluctuation show on screen.

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