What is the trailing stop?
A trailing stop is a modification of a typical stop order that can be set at a specific percentage or dollar amount of the current market price.
A trailing stop is designed to protect profits by allowing the trade to remain open and continue to make a profit as long as the price moves in the investor’s favour. The order closes the trade if the price changes direction by the specified percentage or dollar amount.
Understanding the trailing stop
Trailing stops only move in one direction because they are designed to lock in profits or limit losses. If a 10% trailing stop loss is added to a long position, a sell trade will be taken if the price drops 10% from its maximum post-buy price. The trailing stop moves up only after a new high has been established. Once a trailing stop has been moved up, it cannot go back down.
A trailing stop is more flexible than a fixed stop loss because it automatically tracks the direction of a stock’s price and does not require a manual reset like a fixed stop loss.
Trading Trading Stop
The key to successfully using a trailing stop is to set it at a level that is neither too narrow nor too wide. Setting a trailing stop loss too tight can mean that the trailing stop is triggered by normal daily market movement and therefore there is no room for the trade to move in the trader’s direction. A stop loss that is too short will usually result in a losing trade, however small. A trailing stop that is too large does not work in normal market movements, but it does mean that the trader is taking the risk of unnecessarily large losses or giving up more profit than he needs.
Although trailing stops lock in profits and limit losses, it is difficult to set the ideal trailing stop distance. There is no perfect distance because markets and the way stocks move are constantly changing. Despite this, trailing stops are effective tools and like any other method, there are pros and cons here.
real world example
Suppose you bought Alphabet Inc. . (historically down 5-8% before going back up). These previous movements can help establish the percentage level to be used for the trailing stop.
Choosing 3% or even 5% may be too difficult. Even minor pullbacks tend to move higher, meaning the trade is likely to be trailed-top before price can go higher.
Choosing a 20% trailing stop is an overkill. Based on recent trends, the average retracement is around 6%, with the largest ones hovering around 8%.
A trailing stop loss of 10% to 12% is better. This gives the trading space room to move, but also quickly takes the trader out if the price falls by more than 12%. A drop of 10% to 12% is larger than a typical pullback, meaning something more significant could be happening; basically, it could be a trend reversal, not just a pullback.
With a trailing stop of 10%, your broker will execute a sell order if the price falls 10% below the bid price. It’s 900 dollars. If the price never rises above $1,000 after the purchase, your stop loss will remain at $900. If the price reaches $1,010, your stop loss will move to $909, 10% below $1,010. If the price of the stock rises to $1,250, your broker will execute a sell order if the price drops to $1,125. If the price starts to fall from $1,250 and does not rise again, your trailing stop order remains at $1,125 and if the price falls to that price, the broker will place a sell order on your behalf.
The ideal trailing stop loss will change over time. In more volatile periods, it is better to use a wider trailing stop. During quieter times or when stocks are very stable, a tighter trailing stop loss can be effective. However, once a trailing stop loss is set for an individual trade, it should be left as is. A common trading mistake is to increase the risk of a trade once to avoid losses. This is called loss aversion and it can quickly wipe out a trading account.
Trailing stop is a very useful tool if you know how to use it.
The tool can help you keep their profit on days when you cannot follow the price and move the normal stop yourself.
Adding such a useful tool will help improve your strategy and increase their Profits.
But do not forget about the correct setting of the trailing stop, the values of which will be different for each instrument.
To more accurately determine the values of the trailing stop, it is worth knowing the average daily movement of the instrument, as in the example above.
Traders, if you liked this idea or if you have your own opinion about it, write in the comments. I’ll be happy