How Trailing Stop Loss Works

% loss

For the latter, this means your order will execute at the specified limit price or lower while the sell limit order executes at the limit price or higher. So, Trailing stop loss is a feature that is intended to help traders lock in profits while protecting you from the day trading losses. It puts a limit or cap on the amount that will be lost if the trade doesn’t go well, but doesn’t limit the potential gain if the trade goes in your favor. However, a trader can gauge the right distance from the historical price movements, through backtesting. The aim is to set the trailing stop at a distance from the current price where it is not expected to be triggered unless the price has changed direction.

trading platform

A 10% to 12% drop is larger than a typical pullback which means something more significant could be going on—mainly, this could be a trend reversal instead of just a pullback. At all other loss levels the trailing stop loss outperformed, most notably at the 20% stop loss level where it performed 27.47% better over the 11 year period. As you can see the 15% and 20% trailing stop loss levels give you about the same overall result with the 20% stop-loss level leading to higher returns most of the time. Simply put, a trailing stop order allows you to ride a trend safely. At the same time, you also have an effective exit strategy in place. To help you better understand how a trailing stop order works, let’s look at two trading scenarios — open long position and open short position.

How to Use Trailing Stop Loss (5 Powerful Techniques That Work)

However, there are some things that can be said about in general. In the image below, you see how we entered a trade with our trailing stop loss in place. If the trailing stop had been hit before the market had advanced in our direction, then we would have incurred a loss. Being like a stop loss, a trailing stop can be used to prevent huge losses when trading. Trading involves risk and can result in the loss of your investment.

  • This is an example of a trailing stop loss that has been automated.
  • You have bought 1 BTC at $10,000, and are looking to take profit as the price has reached $11,000.
  • That’s because you determine how much below the top price you’ll allow it to drop.
  • If a sell trade is not possible at or above the stop limit price, the trade will not be executed.

John wants to stop loss if the position gains 30% and therefore set a 30% trailing stop loss on the position triggered on the “Ask” price going “Up” by “30%”. Trailing stop loss can also be used for closing off short options positions like a Naked Call Write or a Naked Put Write. When closing out a short position, you need to buy to close the position on the ask price and would want to do so when the price of the option appreciates. As such, a trailing stop loss order on a short options position would typically use the “Ask”, “Up”, “%” criteria. John wants to stop loss when the position loses 30% of its value and also wishes to allow the profits on the position to run if QQQ rallies as expected.

How to Use a Trailing Stop Loss

For best results, keep working on your trailing stop loss strategy to ensure its effectiveness and tracking your trailing stops to avoid flash crashes or other extreme trading situations. If the market rises to $11,200, and then falls immediately to $11,050, order trigger moves up to $11,100 and the order activates at $11,100 if the price falls sharply. If the market price reaches $4000, the order is triggered and will match the best available bids up to $4050.

If the price reaches $1,010, your stop loss will move up to $909, which is 10% below $1,010. If the stock moves up to $1250, your broker will execute an order to sell if the price falls to $1,125. If the price starts falling from $1,250 and does not go back up, your trailing stop order stays at $1,125, and if the price drops to that price the broker will enter a sell order on your behalf. During more volatile periods, a wider trailing stop is a better bet. 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.

It’s important to understand that stop-loss orders differ from limit orders that are only executed if the security can be bought at a specified price or better. When the price level of a security moves to – or beyond – the specified stop-loss order price, the stop-loss order immediately becomes a market order to buy or sell at the best available price. Stop-loss orders can also be used to lock in a certain amount of profit in a trade.

You should always be doubly sure which one you’re using when placing an order. When trading with a stop loss in forex trading, you benefit from knowing you have an order that will automatically cut your losses. You don’t have to sit at a screen all day looking at the price movement. Even though this type of advanced order is known as a “Trailing Stop Loss”, it is actually more commonly used as a form of automatic profit taking rather than a stop loss.

Trailing stops are effective because they allow a trade to stay open and continue to profit as long as the price is moving in the investor’s favor. This may help some traders cope psychologically with volatile markets. Also, in the case of a trailing stop, there looms the possibility of setting it too tight during the early stages of the stock garnering its support. In this case, the result will be the same, where the stop will be triggered by a temporary price pullback, leaving traders to fret over a perceived loss. An exit point is the price at which a trader closes their long or short position to realize a profit or loss.

Stop Loss Meaning: What Is Stop Loss & Its Benefits – Forbes … – Forbes

Stop Loss Meaning: What Is Stop Loss & Its Benefits – Forbes ….

Posted: Thu, 16 Feb 2023 08:00:00 GMT [source]

The added protection is that the trailing stop will only move up, where, during market hours, the trailing feature will consistently recalculate the stop’s trigger point. You should keep in mind that the market might witness momentary price drops. When this happens, some traders try to reset the stop level on impulse. Otherwise, you may end up with even lower stop-loss than you expected. When the time comes to pay it back, he needs to buy 1 BTC but is reluctant to risk more than $300 on the trade should the market price go up.

The strategy’s popularity is based on the fact that it is based on an asset’s current volatility. That’s up to you to determine, based on your account size and risk tolerance. They might adjust the percentage as their trade becomes profitable. For example, it would be advisable for EUR/USD traders to use a distance of -0,30 pips while trading at night. A trailing stop loss order adjusts the stop price at a fixed percent or number of points below or above the market price of a stock. Learn how to use a trailing stop loss order and the effect this strategy may have on your investing or trading strategy.

Research study 1 – When Do Stop-Loss Rules Stop Losses?

At a stop-loss level of 10%, they found that the monthly losses of an equal weighted momentum strategy went down substantially from −49.79% to −11.34%. Only at the 5% and 10% stop loss levels did the traditional stop-loss perform better than the trailing stop-loss BUT the overall returns were bad. They also found that the stop-out periods were relatively evenly spread over the 54 year period they tested. 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.

However, a trailing stop-limit order requires the broker to close your position at the fixed price or better. A trailing stop-limit ensures that you get the price you requested or better, unlike a trailing stop-loss order, which could be filled at a worse price than you wanted. 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. A trailing stop order is a variation on a standard stop order that can help stock traders who want to potentially follow the trend while managing their exit strategy.

A ton of new traders aren’t sure what a stop-limit order is. When you’re trading, it’s important to safeguard yourself from losses. Can be applied to any market where there is an opportunity for profit and there are enough traders actively participating. Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Mental Exercise to Reduce Impulsive, Random, and Missed Trades – TradeThatSwing

Mental Exercise to Reduce Impulsive, Random, and Missed Trades.

Posted: Mon, 20 Feb 2023 08:00:00 GMT [source]

You go to the trading menu and select ‘buy’ or ‘sell.’ Then select ‘trailing stop,’ with or without a limit. Then enter the percentage or price at which the stop will trail the stock’s peak. The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries.

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.

The enables them to lock-in profits as the security price moves in their favor, and prevents them from large losses if prices move against them. So she sets a trailing stop sell order with a fixed percentage distance of 5% in a falling market. If the market price declines further and the bid price drops to $9,025, the stop order will be triggered and automatically place a market sell order. This can lead to positions being “swung out of position” from big intraday whipsaws that sometimes happen without warning. However, such a whipsaw is sometimes enough for the trailing stop loss order to trigger and close off your position, sometimes for an unnecessary loss.


There are some orders that allow for unlimited time on a GTC order. If you set the value too wide, you might leave too much profit on the table if the stock begins to fall. I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

John up a 30% trailing stop loss on his call options the moment they are bought. Even though it is known as a “Trailing Stop Loss”, it is used not only as a stop loss method but also a profit taking method by most options trading professionals. For example, let’s say a trader has purchased a stock at $20 per share and placed a stop-loss order at $18 a share, and that the stock closes on one trading day at $21 a share. Then, after the close of trading for the day, catastrophic news about the company comes out. Setting up and using Trailing Stop Loss and Trailing Stop Limit orders is straightforward in most trading platforms. Traders simply need to choose the type of order they want to use, set the parameters (e.g. distance from market price), and then place the order.