Thoughts, Trading

Trailing a Tight Stop vs. a Swing Stop: Which is Better?

I was just thinking about the pros of cons of trailing a tight stop vs. a swing stop in the context of intraday trend following for stock index futures.

Let’s say that the market has just made a significant up move and it starts retracing.


Scenario #1: Market Retraces and Trend Continues

  • During the retracement
    • Tight stop doesn’t give back gains (+ve)
    • Swing stop gives back gains (-ve)
  • During the trend continuation from bottom of retracement
    • Tight stop either gains from catching near the bottom of the retracement (+ve) or misses the upside and entered late (-ve)
    • Swing stop recovers the loss from retracement (+ve)
  • Conclusion
    • Tight stop is better because if you are able to catch the bottom you’ll make more than using a swing stop, and if you can’t catch the bottom, you’ll just make the same amount as using a swing stop.

Scenario #2: Market Spikes Down and Bounces Back Up Immediately (Similar situation occurs when the legs of the trends are short)

  • During the spike down
    • Tight stop will get shaken out (-ve)
    • Swing stop will not get shaken out (+ve)
  • During the bounce up
    • Tight stop will have to chase after the price, at an entry worse than the prior exit (-ve)
    • Swing stop remains in position (+ve)
  • Conclusion
    • Swing stop is better in this scenario.
    • When the legs of a trend are short, you get into a similar problem where by the time you exit with the tight stop, the price would be turning around and your entry price would like be worse than your exit price because you would typically wait a bit for a confirmation of the turn.

Scenario #3: Market Retraces and Trend Fails

  • During the retracement
    • Tight stop doesn’t give back gains (+ve)
    • Swing stop gives back gains (-ve)
  • During the failure
    • Tight stop is already out of the market, so does not incur further loss (+ve)
    • Swing stop is continually incurring losses until a swing point is reached (big -ve)
  • Conclusion
    • Tight stop is better.


Open Profits Given Up at Exit 

To have a better perspective, let’s put some numbers into the analysis. Let’s assume you use 2-3 ticks below the highest low of a bar as a tight trailing stop (for longs). If a bar’s range is ~3-4 ticks , you would be exiting 5-7 ticks from the highest price of a swing.

Buffer for Re-Entry

On the re-entry, if you only enter 4 ticks or below from your entry stop, or if you usually only can detect a turn when price has moved ~4 ticks from the turn, then in order to re-enter at the same price you exited (via the tight trailing stop), you need the entire retracement from swing high to swing low to be 9-11 ticks (i.e. add the 4 ticks to the 5-7 ticks earlier).

Retracement Size Scenarios

  • If a retracement is larger than 11 ticks (normal or weak trend), a tight stop is better because your tight stop re-entry price is better.
  • If a retracement is less than 9 ticks (strong trend), a swing stop is better because your tight stop re-entry price is worse.
  • If the retracement turns out to be a trend failure, a tight stop is better because you don’t re-enter thereafter.

Trend Scenarios

  • Normal or Weak Trend
    • Higher chance of hitting a tight stop because there is no strong pusher (worse for tight stop). Tight stops are susceptible to shakeouts, and it is also not suitable when the legs of your trend is short (this can happen on lower volume days for example, or when the market is less decided).
    • Larger retracement (better for tight stop)
    • The choppiness of weak trends + tight stops may result in bleeding which cannot be compensated sufficiently by large retracements.
  • Strong Trend
    • Lower chance of hitting a tight stop because of strong pusher (better for tight stop)
    • Smaller retracement (worse for tight stop)
    • The extra squeezed out by tight stops feels to be greater than the opportunity cost at the re-entry.
  • Seems like swing stops are better for normal or weak trends, and tight stops are better for a strong trend. Tight stops will be better for trend failures.


Tight stops are better for maintaining psychological capital because it protects open profits and puts us in a ‘no-lose’ scenario (let’s ignore the house money concept for now). However if your tight stop keeps getting hit during choppy markets, that can deplete your psychological capital as well.

Swing stops depletes psychological capital when open profits get eroded during chop or retracements.


Tight stops are harder to execute.

  • It requires subjective parameter setting, e.g. how tight should you trail? how should you adjust the parameter based on an active market, normal market, quiet market? how do you detect that the parameter requires adjustment?
  • It requires greater focus because you need to get in and out very quickly and precisely.

As a result, more errors tend to occur when using tight stops, and errors cost money.

In comparison, swing stops are easier to execute with less monitoring needed, the trade-off here is lesser profit potential.


When there is a trend, the mistakes made due to the higher level of skill required to execute tight stops lead to about the same level of profits whether swing stops or tight stops are used. Nonetheless, conceivably, if skill is improved, tight stops will be more profitable.

When a trend does not develop, tight stops will get away with a few ticks of profit, whereas swing stops will incur losses.


Tight stops are more appropriate for times when there is a strong pusher taking on a weak defender, where there is more agreement on the market direction. Tight stops are not suitable in a market (or times in a market) when

  • Shakeouts are not uncommon
  • Legs of your trend are short (this can happen on lower volume days for example, or when the market is less decided)
  • There is just too much fighting between the bulls and bears (a market maker’s paradise)

In such market (situations), a swing stop would be required, else a tight stop will work better.


Purer trends (i.e. a straight move without retracement) typically occur on shorter time frames (e.g. minutes time frame on an equity index futures). As tight stops work better on purer trends, they are more applicable for shorter time frame trading rather than longer time frame (e.g. hours) trading.


Tight Stops

  • Good for strong trends (make money) or trend failures (near breakeven), bad for weak trends (lose money).
  • Good for psychology
  • Harder to execute

Swing Stops

  • Good for weak trends (make money), less profit squeezed for strong trends (make money), bad for trend failures (lose money).
  • Bad for psychology
  • Easier to execute


Execution can be trained. Psychology can be trained. What cannot be changed is how the market moves. So the question is, for a trend change or trend continuation setup, what is the % probability of strong trends, weak trends, and trend failures?

Tight stops lose money on weak trends. Swing stops lose money on trend failures. Which one occurs more often? trend failures or weak trends?

Just from pure feeling, I suspect that for a trend setup, on average it’ll work 50% of the time so 50% of the time it trends (either weak or strong), 50% of the time it fails. So the probability of trend failures is higher. That implies that tight stops are better because they help to keep the average loss of a trend failure situation (50% of the time) to be low, because losses due to initial stops being hit are offsetted by small gains when price moves a short distance in the direction of your trade but a trend does not materialize.


From the probability considerations above, if a single type of stop is chosen because at the point of entry we don’t know whether it will be a strong trend, weak trend, or trend failure, then it appears that a tight stop is better.

One hybrid approach I’m thinking is to always start off with a tight stop, to address the scenario where a trend does not materialize. And when a trend does materialize, switch to a swing stop. Finally when you detect that a trend is near exhaustion, switch back to a tight stop. This approach uses the most appropriate stop for the situation at hand. The 1st situation is trend or no trend, so a tight stop is better. The 2nd situation would be strong trend or weak trend, then a swing stop is better. The 3rd situation would be to address the case at trend exhaustion where the reward becomes small and the risk is larger, then a tight stop is better. This 3rd situation also applies when price is near a significant level (e.g. support / resistance, VWAP, etc.) because in those situations is also the case that the potential reward is small so you want to limit the risk by tightening the stop.


I think a hybrid approach appeals to me more rather than choosing one over the other. I’ll trade with that over some time to see how it goes.



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