TRAILING STOP LOSS
Trailing Stop Loss is different from a regular stop loss order. A regular stop loss order must be changed manually, while a trailing stop loss is adjusted automatically based on the amount or percentage you set. As a trade become profitable the Trailing Stop Loss is used for securing the profit and reducing the risk.
Trailing Stop Loss for Reducing the risk:
When a stock is purchased by you, you expect it to get upward, but in case if it goes down, you want to limit your loss by selling it if it declines below a certain point. For example, ABC is purchased by you at $25.50 and you want to limit your loss to 10%, so you put in a stop loss order to sell at $22.95. If ABC declines to $22.95 then your stop loss will be activated and your order will be carried out at the next market price. On the other hand, if ABC raises in price you will continue to have it.
Trailing Stop Loss for Protecting your profit:-
At some point ABC reaches $36 and stops. It is not sure to you if it will continue to go up or turn back down. You don’t want to sell too early, nor do you desire to lose your profit. Then, you move your stop-loss to $33.90. Once more, if ABC turns down to $33.90, you will be sold out of it – stopped out. Otherwise, you will continue to keep it. You can continue to make changes your stop-loss upward as ABC advances.
Advantages and Disadvantages of Trailing Stop Loss:–
Your time and effort of recalculating as well as of changing your stops manually are saved by trailing stop loss. Trailing stop loss takes the emotion out of decision making, but it has a more eminent chance of being triggered without any cause. Stocks are less expected to reach some price plateaus than others. A stock move forwards by building a series of higher highs as well as higher lows. The accurate price of placing a stop is right below the most recent low. You can read everything on how to become a currency trader here.
Trailing stop losses are less effective in ranging or choppy markets as traders can be stopped out (automatically exited) prematurely when prices move erratically. This implies that even if prices do eventually make a motion in the focussing of your trade, you may have missed the opportunity of profiting from this or it may submit several entries to eventually catch the trend.
The trailing stop offers a clear benefit in that it is more flexible than a fixed stop loss. It is an attractive alternative as it allows you to continue protecting your capital if the price drops. However, as soon as the price increases, the trailing feature kicks in, allowing you an ultimate protection of profit while still reducing the risk to your capital. One of the greatest features of a trailing stop is that it is available for stocks, options as well as futures exchanges that presently support a traditional stop-loss order.
In an automatic trailing stop loss order the position is automatically adjusted as the price of an asset moves in your favor. While with a manual trailing stop loss order the same principle as an automated trailing stop loss is followed, but as the price moves its position is manually adjusted by you. Technical indicators as well as price action will help you to decide that where to position a manual trailing stop loss plus when to adjust it. You can also make use of swing highs as well as lows to trail your stop loss.