A trailing stop loss order is an excellent way to lock in profits. While traditional stop-loss orders don’t trail, trailing stops do. This means that, as the price of a stock increases, the trailing stop will stay at its pre-established level. This allows you to lock in profits on new highs and protect your downside. In some cases, you may even use a trailing stop in conjunction with traditional stop-loss orders to increase your profits and lock in profits.
Trailing stop losses aren’t appropriate for all stocks, and traders should use caution when using them. For instance, if a stock is extremely volatile, it is more difficult to trade with them. The risk of setting the stop-loss order too low can be huge, and a trailing stop loss may cause an order to be filled prematurely due to daily price movements. It may also trigger an unwanted sale in the event of a sudden, irrational price drop.
A research study showed that when investors used trailing stop-loss strategies, they made higher returns in the stock market. The researchers used a simple momentum strategy whereby they bought ten percent of companies with the largest increase in price over the last six months, and sold ten percent of companies with the biggest fall in price. When the stop-loss trigger was triggered on any day, they closed their position and moved the money to a risk-free asset.
When using trailing stop-loss, keep in mind that its ideal length varies with the market. For example, a wider stop-loss during volatile periods will result in more profits, while a shorter trailing stop loss will be more appropriate for more stable stocks. But regardless of the length of your trailing stop-loss, it is important to maintain it at a constant percentage. Loss aversion can cripple your trading account very quickly.
A trailing stop-loss should be placed after the stock’s history and current market conditions. You should never set your trailing stop-loss too close to the market price, because this will result in an early exit from a position. Similarly, a trailing stop-loss should be placed above the market price if you are buying, while a lower one should be used for short-selling. A trailing stop-loss should also be placed one ATR below the market structure.
A trailing stop loss is a free risk management tool. It follows the price and adjusts itself when it moves in your favor. It also helps lock in profits by limiting the downside risk. This strategy is great if you don’t have much experience in trading. However, you should be aware of the risks and benefits associated with trailing stop-loss. The Next Generation trading platform gives you examples of trailing stop-loss placements.