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Stop Losses: How to Use Trailing Stops Part 4 🏳️

The Trailing Stop. http://www.financial-spread-betting.com/course/trailing-stops-limit-order.html PLEASE LIKE AND SHARE THIS VIDEO SO WE CAN DO MORE! You may have come across the idea of a trailing stop when looking through the types of orders that you can give to your broker. But a trailing stop is much more than just a simple order, it is a whole family of ways to look at exiting a trade.

Trailing stop simply means that your stop loss position moves, and trails behind where the price actually is. The idea is that you lock in a certain amount of profit as your trade develops, and your trailing stop will follow the price up at a distance, so with a winning trade you are assured of a profit over your entry position soon after placing the trade. With a fixed stop loss position such as discussed previously, if the trade suddenly plunged past your entry point you might otherwise find yourself facing a loss.

The first type of trailing stop entails using a moving average to tell you to exit the trade. This might be a five period moving average, which will follow the price closely. If the price comes back down and touches the moving average, that’s your stop loss signal and you should exit the trade. Depending on what your goal is for the trade, you might choose a longer period moving average, which while it will allow a greater drop before triggering, would keep you in a winning trade for longer even if the price is fluctuating a lot.

An alternative used by some traders is to use a tight moving average at the start, and when the trend is established and you’re making a profit, switch to a longer time moving average so that you can stay with the trade as long as possible.

Another way to use a trailing stop is called the ratchet method. In this, the position of the stop loss is moved up in steps, ratcheting its way up behind the price. Once again, this means that you never go back to the starting position of the stop loss, so no matter how catastrophic the reversal you’re still going to take a profit. Thinking back to the typical three step trend, a ratcheting trailing stop might move the trailing stop level up after each pullback, to just under the low point of the pullback.

Discussion of the trailing stop would not be complete without considering the trailing stop which your broker can offer to you, or which you could also emulate manually if you choose not to place your stop with your broker. With this type of trailing stop, you will set a distance away from the price that you want to stop to be. This could be a percentage, or more commonly is an absolute value.

Your trailing stop will rise incrementally as the price does, staying the set distance away. But the trailing stop level never goes down, even when the price does. So if the price reverses too far, it hits the trailing stop and you are out of the trade. All the time the price is going up, your trailing stop is rising and you are locking in more profit. This works particularly well if you are trading on a trend, and you don’t know how far it will go on.

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