How Trailing Stop Loss Works


It only requires you to the right dollar amount, like $10, and the script trails the price at that price distance until the trade is stopped out. To choose the right percentage level for your trailing stop, you find a level that is neither too tight nor too wide. In other words, to close a long position, the trader must place an equal sell order in the market.

price hits
traditional stop loss

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. 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. A trailing stop-loss order is a market order that instructs your broker to close the trade once the price hits the specified level.

What Are the Risks of Trailing Stop Orders?

You do this by specifying how much you want the price to continue moving in your favour before it is automatically closed for good. And, here if the price moves back to $40.15, the trailing stop will remain the same, i.e. it will stay at $40.10. If the price falls down continuously and reached to $40.10, the trailing stop loss order will be triggered and would be converted into a market order. Here, you will exit the trade at $40.10, which means that you have protected 10 cents of profit per crypto asset.

set stop loss

People often call trailing stop loss orders profit protecting stops. This is because they will move along with the security as long as the price action is favorable to your trade. However, they will come into effect as soon as the trend reverts.

What is the difference between a stop limit and a trailing stop limit?

With the trailing stop loss, it all happens automatically, so you and your trader don’t constantly have to watch the stock price. When an investor is long a stock, a trailing stop loss reflects a sell order. When an investor holds a short position and expects a stock to fall, a trailing stop loss reflects a buy order. For this strategy to work on active trades, you must set a trailing stop value that will accommodate normal price fluctuations for the particular stock and catch only the true pullback in price. This can be achieved by thoroughly studying a stock for several days before actively trading it. Any further price increases will mean further minimizing potential losses with each upward price tick.

Trailing Stop on Profit MT4/MT5 Expert Advisor – EarnForex News

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If the moves quickly against the position, a stop-loss order is placed near or at the current market price. Understand how the trailing stop loss order helps to maximize your profits. Use a trailing stop loss order instead of selling at a predetermined level.

Be Cautious When Using Trailing Stop Loss Forex will usually trail their stop loss by 2 or 3 previous levels so they can ride the trend. In the chart below, the PSAR dots are the levels where you would place your trailing stop loss. This is usually used to trade stock market indexes, but it can also be used in other markets. When moving averages cross, that can be a good indication that a trend is coming to an end. From there, if price hits 200 pips of profit , you maybe you trail your stop loss to 100 pips of profit.

If the stock price rallies to $25, then the trailing stop-loss order will trigger at $24. If a trader leaves the order open indefinitely, it will automatically update until a decline triggers it. The stop-loss should only be hit if you incorrectly predicted the direction of the market. Your dollars at risk on each trade should ideally be kept to 1% or less of your trading capital so that a loss—even a string of losses—won’t greatly deplete your trading account. 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.

What Is a Trailing Stop? Example and How to to Use It – Investopedia

What Is a Trailing Stop? Example and How to to Use It.

Posted: Sat, 25 Mar 2017 19:20:52 GMT [source]

Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. 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 the price of asset moved higher, the trigger will also move higher keeping at distance of $100.

To make your life easier, there’s a useful indicator called “Chandelier stops” which performs this function. “Conviction on trailing stop use and its comparative advantage over the actual fixed value stop loss.” “I’m new to stock buying, now I have a good idea of what a trailing stop is. Thanks for the great information.” I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. Michelle Jones is editor-in-chief for and a daily contributor for and has been with the sites since 2012.

Trailing Stop Loss orders are similar to Fixed Stop Loss orders, but they are more dynamic. They are set at a specific distance from the current market price, and the order price will move with the market price. This type of order is useful for traders who want to lock in profits while also reducing the potential for losses. As the price decreases, so do the trailing stop as well, maintaining its fixed distance.

These scenarios are also useful in deciding when to execute Sell orders and Buy orders. Although stops are meant to protect your capital, setting them close to the price endangers your account. Use a customized risk management plan to identify your trailing stop percentage. Add X ATR from the lows to get your trailing stop loss if you are on short-term trends.

Trailing Stop Loss: What It Is & How It Works

Trailing Stop Limit orders are a variation of Trailing Stop Loss orders. The main difference is that they have a limit price, which means that the order will only be executed if the market price reaches the limit price. This type of order is useful for traders who want to limit their potential losses while also taking advantage of market movements. Investor’s Edge calculates the price that will trigger your buy order, based on the stock’s current market price. The trigger price is recalculated as the market price falls. The trigger price does not change when the market price rises.


Now that we have covered what a trailing stop loss is, we will have a quick look at the two different order types you can use when the market hits the stop loss level. It can be used to protect profits generated through short selling or when trying to buy a stock that is bouncing off a market low. You want to benefit as your stock moves higher and you’re willing to wait for your gain, but you think that’s unlikely to happen immediately. The main advantage of the ATR and MA trailing stop-loss indicators is that a spike in the price may cause them to be triggered, kicking you out of the trade. You could be taken out of a trade prematurely due to the spike since the ATR and MA are lagging indicators; hence, they will not react immediately to sudden price changes.

  • They can help you to make the most of your stock investments.
  • We actually have the type of order that makes it possible for traders to lock them in profits.
  • With this in mind, let’s move on to potential trailing stop-loss strategies to deploy in your trading strategy.
  • But traders should clearly understand that in some extreme instances stop-loss orders may not provide much protection.
  • In that way, the stop level is continuously increased as the market moves, thus becoming a trailing stop.

The price dipped to $91.48 on small profit-taking, and all shares were sold at an average price of $91.70. When combining traditional stop-losses with trailing stops, it’s important to calculate your maximum risk tolerance. 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.

But if the price starts falling, the stop loss will not move. Moving Average Trailing StopFrom the chart above, you can see where the trade was entered and how the moving average followed the price. When the price eventually hit the moving average, the stop was triggered, closing the trade. While it is easier to use a trailing stop to lock-in profits, a normal stop can also be used to trail the price. It only requires the trader to regularly move the stop loss to a new level, based on how the price has moved and the trailing method. The main difference between a trailing stop and a normal stop loss order is that the former automatically follows the price movement when the price is progressing in the direction of the trade.

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