The One-Bar Trailing Stop Loss, Aggressive and Effective
Cory Mitchell, CMT
The one-bar or one-candle trailing stop loss is aggressive and effective when attempting to capture a sharp price move. I use it regularly when trading price action strategies in the forex market (works in other markets too).
The goal is to get into a trade using price action, which tells us when the price is likely starting a bigger move. Then, the trailing stop loss captures a chunk of that move.
This trailing stop loss doesn't hold through any sort of pullback. If you have a hard time holding through a pullback, or end up bailing out of a trade when it pulls back more (or takes longer) than you expect, then trailing stop loss method may be for you.
Implementing the One-Bar Trailing Stop Loss
The bar trailing stop loss follows the most recent price bar or candle.
- For a short trade, and with the price moving lower, the stop loss is moved to just above the high of the most recently completed price bar/candle.
- It only moves down, never up.
- For a long trade, and with the price moving higher, the stop loss is moved to just below the low of the most recently completed bar/candle.
- It only moves up, never down.
A few examples are shown on the following chart.
One Bar Trailing Stop Loss Pros and Cons
This isn't the type of trailing stop loss you want to use with every strategy.
It is meant to capture bursts of momentum. That means the strategy it is used with needs to be good at determining when those bursts may occur.
If you can capture the bursts, the trailing stop loss captures the immediate momentum. This prevents holding though a pullback, which could turn into a reversal.
Due to the aggressive nature of the trailing stop loss, the risk of the trade is reduced very quickly. This means losses are typically small, along with lots of small winners, and the odd big winner. It is still possible to capture large trends with this type of trailing stop loss. When price is running, it may do so for extended periods of time, without hitting the stop loss.
If you want to hold to capture big gains all of the time, this isn't the trailing stop loss to use. Possibly try a moving average, Renko charts, or a multiple of Average True Range (ATR) if you want to hold through some of the price gyrations for larger gains.
Many people struggle to stick with their strategy, and make lots of mistakes, when the price starts to pull back. If you are one of those people, consider using this type of method as it will greatly simplify the trading process.
This trailing stop loss is designed for the active trader. Get into a trade, trail the stop loss, and take profits with the trailing stop loss. Jump back in if a new opportunity presents itself.
I have used this trailing stop loss method on every time frame, 1-minute, 5-minute, hourly, 4-hour, daily, weekly charts, and so on.
Customizing the One-Bar Trailing Stop Loss
The base model works well, but customizing it may work better for you. There are two customizations I will discuss here: buffers and multiple candles.
Consider adding a buffer. Instead of placing your stop loss right below the low of the last candle on a long, or right above the high of the last candle on a short, consider giving it a set amount of room. This may need to be adjusted for each pair.
If day trading you may opt to give it one, two, or three pips of extra wiggle room. If trading an hourly chart you may give it five pips, or 10 pips on a daily chart. These are just examples. The buffer you give will depend on what pairs you are trading and on what time frame.
Adding a buffer will sometimes save you from an early stop out, but it also means you are giving up a few extra pips of profit when the price actually reverses.
Another option you could consider is using a two-bar or two-candle trailing stop loss. Instead of using the low (if long) or high (if short) of the last candle, use the low or high of the last two candles. This once again provides a bit of flexibility. It will likely keep you in trades in longer, helping to eliminate some of the pre-mature stop outs, but on the flip side you will be giving up more profit when the price reverses.
There is no perfect formula. The goal is simply to extract profit, and customizing the base model of the strategy may work better in doing that for you. Test out some variation to see which method you like best.
Price Action Entries and Stop Losses
We just discussed a trailing stop loss that can be used when trading price action. As for entries, based on price action, check out the following video. It highlights how to monitor price by comparing the size of price waves. This will often tell us when a correction is ending and the price is about to resume the trend.
We won't always be accurate with our entries. Sometimes the price looks like it is about to move one direction but then moves the other—a false reversal. That is fine. This stop loss will often reduce our risk if we get any movement in our direction. We get out, and then take another trade if the opportunity is there.
By Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.