How Trailing Stop Loss Works

exit strategy

However, a ing stop has the characteristic feature of being able to automatically move with the price when the price is moving in the direction of the trade. But by using a moving average as your trailing stop loss, you would have been able to capture more profits by waiting for a close above the moving average, as shown above. One thing to be aware of about trailing stop-loss orders is that they can get you out of a trade too soon, such as when the price is only pulling back a bit, not actually reversing. To try to prevent that scenario, trailing stops should be placed at a distance from the current price that you do not expect to be reached unless the market changes its direction. A trailing stop-loss order is initially placed in the same manner as a regular stop-loss order. For example, a trailing stop for a long trade would be a sell order and would be placed at a price below the trade entry point.

current market price

I am confident that you will greatly benefit in your trading journey by considering one or more of these resources. You can implement trailing stop-loss orders using several techniques. These include setting up automatic orders with your broker or manually adjusting your stop-loss orders based on price movements, trading volumes, or other technical indicators. If you buy a certain stock at $50.15 and set a regular stop-loss at $50.05, you are risking $0.10 per share. If the price drops down to $50.05, the stop-loss order will automatically execute to get you out of the trade. The stop-loss order doesn’t move; it stays as is irrespective of the price going up or down.

Why would a stop-loss order be placed above the purchase price?

He is the most followed trader in Singapore with more than 100,000 traders reading his blog every month… There’s no rule to say you must either capture a swing or ride a trend. The market tends to “hunt” stop losses below Support or swing low.

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When the price action consolidates and then breaks higher, a trader may decide to move their stop-loss sell order up so that it’s just below the latest point of consolidation. This works best for swing and short-term traders who aren’t interested in holding a stock through ups and downs—they want out of the trade as soon as the trend changes. A trailing stop loss allows you to set a predetermined value at which your position will automatically sell-off. For example, if the price reaches 100 pips and your preset level is 50 pips, your trade will close.

Trailing Stop-Loss Order Examples

The main risk is the amount you are willing to lose will be different each time. When you let your stop loss trail too close, it may not give you enough warning before a major drop occurs in the market. This can leave your account with less money than what was expected at first or even no change if there is an extreme drop in price for the currency being traded. There are several disadvantages of using Trailing Stop Loss. The main disadvantage is that the trader needs to be online all the time in order for his or her trades to work out well. This means he will always need to monitor what’s happening on his trading account, particularly when it comes to whether a trade has hit its predetermined price/level or not.

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The following are some of the common benefits of using a stop. A stop order is an order to buy or sell a security when the price reaches the specified price level, known as the stop price. When the price reaches the stop price, the stop order becomes a normal market order. A stop order is usually placed ahead of the price in the intended direction. So a sell stop order is placed below the current price level, while a buy stop order is placed above the current price.

They Can Lead to a Premature Exit

In this trade, a trailing stop-loss distance of 3.5 ATR values would have kept you in the trade for much longer, leading to your reaping the trade’s maximum profits. For example, you can use the ATR values on the hourly chart if you want to hold the trade intra-day or for a few days. You can switch to the ATR values on the daily chart if you plan to hold your trades for several days at the least, extending into a week or more. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

Another trailing stop method that’s not widely talked about, but can be very effective, is the risk multiple trailing stop. Then don’t be afraid to test out your own settings, based on your observations. If you don’t have a plan, there can be the tendency to doubt yourself and feel like you missed out on profits.


This shows you that the stop-loss was not just triggered by a small number of large market movements . When a 10% loss was exceeded the portfolio was sold and invested in long term US government bonds. The number of dollars you have at risk should represent only a small portion of your total trading account.

It will likely fall through the whole-dollar and half-dollar levels first. A stop becomes a market or limit order when a stock hits a predetermined target price. You need to set a stop point for a trade, even if it’s only written on your trading plan. This is great for both swing traders and part-time traders. It allows you to ride a stock as it uptrends and exit when the uptrend reverses a certain percentage. A major key to limiting your trading losses is planning your trades.

  • When this happens, some traders try to reset the stop level on impulse.
  • Can be applied to any market where there is an opportunity for profit and there are enough traders actively participating.
  • For trailing stop sell orders, as the inside bid increases to new highs, the trigger price is recalculated based on the new high bid.
  • For example, a trader may decide they want to sell when the stock price declines by $1.
  • So the number of shares you’d buy is 10 shares at $100.

Many platforms have scripts that calculate the price value and drag the stop order accordingly. All you need to do is to set your chosen percentage, say 10%. Trailing StopOn the other hand, if a trailing stop is too far away from the current price, it will mean giving back more profits than is necessary to find out if a trend has reversed.

What a stop loss strategy also does is it gives you a disciplined system to sell losing investments, let your winners run, and invest the proceeds in your current best ideas. It also increased the Sharpe ratio of the stop-loss momentum strategy to 0.371, more than double the level of the original momentum strategy of 0.166. Surprisingly, all traditional stop-loss levels from 5% to 55% would have also given you better returns than the buy and hold (B-H) strategy. This is a short test period but it included the bursting of the internet and the financial crisis.

Every time price moves 25 pips, you move your stop loss 25 pips to lock in your profits. The final method that I want to share with you in this tutorial is to exit a trade after price has retraced by a certain percentage of the high or low of the move. In the chart below, the PSAR dots are the levels where you would place your trailing stop loss. These levels take into account the current volatility of the markets and are usually easy to spot. When the market is quiet, the stop loss will be smaller and price has to move less to hit your R levels and start locking in profits. In this short trade example, the EA will move the stop loss to breakeven when price hits 2R, then trail the stop loss by 1R when price hits 4R.

Trading Guides

The trailing stop loss order can help make the decision to sell easier, more rational and less emotional. It is designed for the investor who wishes to minimize risk, helping him or her minimize losses while maximizing potential gains. Shrewd traders maintain the option of closing a position at any time by submitting a sell order at the market. Using a 10% trailing stop, your broker will execute a sell order if the price drops 10% below your purchase price.

The stop loss will only move as the action goes in your favor. Next, we will enter the $1.50 in the amount for the trail. Remember, the trail is a sell order since we are long the stock. To activate a trailing stop, you will first need to enter a trade. You can use this type of order to prevent significant losses during day trading. Through technical analysis, John came to the conclusion that QQQ is going to make a moderate move upwards and wished to profit from this small rally by writing QQQ put options.

As a general guideline, when you buy stock, place your stop-loss price below a recent price bar low (a “swing low”). Which price bar you select to place your stop-loss below will vary by strategy, but this makes a logical stop-loss location, because the price bounced off that low point. If the price moves below that low, you may be wrong about the market direction, and you’ll know that it’s time to exit the trade. It can help to study charts and look for visual cues, as well as crunching the numbers to look at hard data. They can help you to make the most of your stock investments. This means that investors are able to take advantage of rising markets without needing to watch the market constantly.

how trailing stop loss works

Once the run is over, if all goes well, you can cash out. With blue-chips and other larger stocks, it’s usually not an issue. Read on to find out more about how stop-losses can help you trade smarter every day. Can help protect potential profits while providing downside protection. The first step is to choose a currency pair, establish an account with at least $100 and open your first position by placing a BUY order of EUR/USD.

And, here your market order will be filled near the 5% loss point. Let’s say you are entering a short trade by selling a crypto asset at $40 per share. With a 10 cent trailing stop loss, you would be stopped out with a 10-cent loss if the price moves up to $40.10. For instance, a security trading at $100 can have a stop limit order of 10% stop price and $2 limit price. This will translate to a stop price of $90 and a limit price of $88. In this case, the sell order can only be filled between $88 and $90.

  • If you observe that the ordinary stop loss and stop limit orders only limit the specific amount of loss that you define while placing the order.
  • What’s more, they can sometimes result in further losses if used inappropriately.
  • You, of course, will need to determine which method works best for you, but there is no harm in getting in the habit of taking profits.
  • The goal is to help you lock in profits while protecting you from losses that can occur during trading.
  • If you trade a lower volatility pair like the EURGBP, then 25 pips might work well.
  • But you aren’t sure it can run before it breaks out through the resistance level.

The trailing stop you set will follow a stock in a profit-making direction. That way, you’re protected if the trend reverses … but the same issue with limits applies. So before adjusting a trailing distance for every order, we recommend you analyze volatility levels and market trends for every asset individually. Correspondingly, once you place a 10% trailing stop-loss to a short strategy, a buy order will get triggered when the price of the asset crosses the 10-percent mark.

Your order would be submitted based on the last price of $10.76. Assuming that the bid price was $10.75 at the time, the position would be closed at this point and price. The net gain would be $0.75 per share, less commissions, of course. “Above the market” refers to an order to buy or sell at a price higher than the current market price. A trailing stop is more flexible than a fixed stop-loss order, as it automatically tracks the stock’s price direction and does not have to be manually reset like the fixed stop-loss.

Before you enter a trade, you need to know where you’ll get out and where you’d ideally like to take profits. Using a trailing stop-loss order strategy in your trading is an excellent way to ensure that you reap the maximum profits from a trend while protecting your gains. Most traders use the 20-period moving average or exponential moving average to ride a trend up to exhaustion. Therefore, you can use the same setting to stay in a trending trade up until the trend is exhausted and the MA takes you out of the trade. Trailing stop orders submit a market order when triggered, generally offering execution. Managing a position is essential in trading and it’s important to understand the risks you face when using trailing stops.

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