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Trailing Stop: What Is It? How to Use It?

Adam Lienhard
Trailing Stop: What Is It? How to Use It?

A trailing stop order is a type of order that is designed to lock in profits or limit losses as a trade moves in a favorable direction. Unlike a regular stop order, a trailing stop order moves with the market price, increasing the stop price as the market moves in your favor. This means the proportion of loss you are willing to accept remains constant as the market moves in your favor. Learn more about this type of order in today’s article.   

How does trailing stop work? 

A trailing stop order is a type of order that helps you set the maximum possible loss on a position. It automatically adjusts the stop price as the market price increases in your favor. This means that as long as the market price continues to rise, the stop price will move with it, protecting your profits. However, if the market price falls, the stop price will remain at its highest point, allowing the market to close out the position at a higher price.

How to use trailing stop?

To use a trailing stop order, you must first decide how much the stop will trail the price. This can be a percentage or a fixed-dollar amount. This is a critical consideration because it will determine how much profit you will lock in versus how much risk you are willing to bear if the market moves against you. 

Once you have decided on the trailing amount, you can place the trailing stop order. This involves selecting the ‘buy’ or ‘sell’ option, choosing ‘trailing stop’ as the order type, specifying the number of shares, and entering the trailing amount.

Trailing stops can be used with various strategies, including following support and resistance levels, using indicators such as the Parabolic SAR (PSAR), or setting the stop based on a certain percentage retracement of the price.

Please, notice! There’s no one-size-fits-all strategy for trailing stops. The best method depends on your trading style, risk tolerance, and specific market conditions. Therefore, it’s recommended to test different strategies and adjust your trailing stop accordingly

Trading algorithm for a trailing stop order

1. Decide on the Trailing Amount: This is the amount by which the stop price will trail behind the current market price.

2. Place the Order: On your trading platform, select ‘Buy’ or ‘Sell’ depending on whether you expect the market to go up or down. Then, choose ‘Trailing Stop’ as the order type. Enter the number of shares you want to buy or sell and the trailing amount.

3. Monitor the Order: Once the order is placed, the stop price will start trailing the market price. If the market price rises, the stop price will increase as well. If the market price falls, the stop price will remain at its highest point.

4. Adjust the Order: If necessary, you can adjust the trailing amount while the order is still active. This can help you manage your risk better.

Remember, successful trading requires a good strategy and the ability to adapt to changing market conditions. So, don’t hesitate to adjust your trailing stop orders as needed.

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