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How Trailing Stop Loss Works


This may help some rs cope psychologically with volatile markets. Next, you must be able to time your trade by looking at an analog clock and noting the angle of the long arm when it is pointing between 1 p.m. Now, when your favorite moving average is holding steady at this angle, stay with your initial trailing stop loss.

price hits

It is not guaranteed that you will get the price of your stop-loss order. For example, when asset values decrease rapidly, your order may not be completed at the stop price you specified. This may force you to sell at a lesser price than you anticipated. If you hadn’t modified the original stop-loss with a trailing order, you might still be in the trade and profiting from positive price movements. Using the same example, if the price rises to $10.5, our trailing stop-loss order will rise to $10. This is an example of a trailing stop loss that has been automated.

How Can Market Psychology Help Me With Trailing Stops?

Let’s say you bought 100 shares of Facebook Inc. at $100. Checking the Facebook price chart, you saw that the stock is trending up and that, historically, the price usually pullback about 4% to 10% before continuing to move up again. You can decide to trail by a percentage of the price movement. Although a trailing stop can help a trader to lock-in profits and makes trade management easy, it may not be helpful at all times.

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The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Market orders, limit orders, and stop orders are common order types used to buy or sell stocks and ETFs. Trailing stops can provide efficient ways to manage risk. Traders most often use them as part of an exit strategy. Investments were made on the first trading day of every quarter .

Placing a Trailing Stop Loss Order

Newer traders sometimes forget how crucial it is to protect their capital. But if you don’t think about it — and especially if you trade with a small account — you can blow up your account fast. If the stock hits that stop, your market order is automatically filled. Stop-loss orders can be useful … They can prevent emotions from interfering with cutting losses.


You can decide how long your trailing stop will be effective—for the current market session only or for future market sessions as well. Trailing stop orders that have been designated as day orders will expire at the end of the current market session if they haven’t been triggered. But good-’til-canceled trailing stop orders will carry over to future standard sessions if they haven’t been triggered. At Schwab, GTC orders remain active for up to 180 calendar days unless executed or canceled.

Trailing Stop Loss

This means if you want to a short-term trend, you can trail your stop loss with a 20-period Moving Average — and exit your trade if the price closes beyond it. Another criticism is that trailing stops don’t protect you from major market moves that are greater than your stop placement. Consider a long position where the stock is trading at $110, there’s a stop loss level of $100, and a stop limit level of $98. If the stock drops suddenly from $110 to $95, meaning that the price has dropped through the stop limit level, the position will not be closed. The trader will continue to be at risk of further declines in this stock. However, had there been no stop limit level, the position would have been closed at the best available price after the stop loss level was reached.

Remember, first you gotta be sure the stock is liquid enough for you. But any less than one million and there might not be enough volume for you to exit if the trade goes south. Once you select your order type, enter your stop price. The stop-loss order then turns into a limit order when the stock hits your stop. Learn what you need to know before trading the market. Match ideas with potential investments using our Stock Screener.

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Input the trailing stop distance and the trailing step, and limit values to setup your trailing stop-limit order. You can automate your trailing stop-loss orders and limit orders by using Expert Advisors made to track changes in the ATR, the MA and any other indicator you choose. The stop-loss momentum strategy also completely avoided the crash risks of the original momentum strategy as the following table clearly shows. For the value-weighted (by the last month-end market value) momentum strategy, the losses were reduced from −65.34% to −23.69% (to -14.85% if August 1932 is excluded).

So, you need an adequate cushion to account for a rapid rally. Usually, a 2% cushion can work well to catch most breakouts. It’s impossible to talk about stop losses without discussing risk. This is the amount of money you’ll lose if the trade doesn’t go your way. But on the fast-moving low-priced stocks we love to trade at StocksToTrade Pro, there needs to be at least 1% cushion depending on the liquidity. Less liquid stocks need a bit more room … and we don’t trade the illiquid stocks.

Flexibility in Managing Trades

An example of this is to have a stop loss set at 10 cents below your entry and the trailing stop at 15 cents below your entry. As the price increases, the trailing stop will surpass the fixed stop loss, making it obsolete. But using a stop-loss order can help you keep losses to a minimum — especially if you can’t monitor your positions all day. Trading financial products carries a high risk to your capital, especially trading leverage products such as CFDs. You should consider whether you can afford to take the risk of losing your money. However, a 15% move in a currency pair is almost impossible as most currencies move about 0.5% – 2.0% daily.


Quickly work the other way to see how much you can risk per trade. If you have a $5,000 account, you can risk $5,000 ÷ 100, or $50 per trade. If you have an account balance of $30,000, you can risk up to $300 per trade . Stop-loss orders can be effective when they’re calculated and placed correctly.

The goal of a trailing stop limit order, and stop limit orders in general, is to ensure traders don’t sell below a price they are comfortable with if the stock price falls suddenly. If a sell trade is not possible at or above the stop limit price, the trade will not be executed. Automatically moves the stop loss level without requiring a trader to reset it themselves. Traders can use trailing stops to ride trends that are in their favor, while exiting when a reversal sets in. Most traders set their stops based upon long- and medium-term support and resistance levels or a defined percentage that fits their risk tolerance. Theoretically, a stock which breaks support or resistance will fall or rise to a new levels before reversing course.

A regular stop loss has a fixed value, but you can readjust it. If you were using a regular stop loss in the example above, your sell order would execute once the price went all the way back to $9.85. A stop-loss order can potentially protect you from huge losses. Managing your risk is the most important part of trading.

trigger price

During quieter times, or in a very stable stock, a tighter trailing stop loss may be effective. That said, once a trailing stop loss is set for an individual trade it should be kept as is. A common trading mistake is to increase risk once in a trade in order to avoid losses. This is called loss aversion , and it can cripple a trading account quickly. Downward meaning they move against you to increase your potential for losses or risks.

Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks. QQQ unfortunately didn’t perform as expected and started going downwards. John’s put options are automatically closed out through the trailing stop loss order when they appreciated from $1.00 to $1.30, making a loss of $0.30. Also, if you have a full-time job and can’t watch your positions all day, it’s important to have a strategy for protecting your account. If you’re trading with a small account, you can’t risk too much in one trade. When going long in a trade, you could put your stop loss below a support level, just below your entry, or at breakeven once the trade is going in your favor.

  • When the price rises from $100 to $150, the trailing stop will be at $132, and when the price gets to $200, your stop will be at $176.
  • Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments.
  • At this point you are in a profitable trade and things can only go further in your favor.
  • The stop is the price where you want to cut your losses.

Try a few different exits, get some stats and pick the one that works best for you. Sometimes the improvement in your return can be dramatic when you add a trailing stop. Knowing these stats will give you a baseline to compare with your strategy with a trailing stop. The bottom line is to avoid using a fixed value trailing stop. But if you trade a more volatile pair like the GBPJPY, then 25 pips will probably be too small and you’ll get stopped out a lot.

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