How to use a trailing stop loss

Video: How to Use a Trailing Stop Loss (Order Types Explained)

Content

Steps
Part 1 of 2: Trailing Stop Loss
Part 2 of 2: Setting a Trailing Stop Loss of an Oredra
Tips
Warnings

A trailing stop loss (trailing stop) is a type of an exchange order, or order. Execution of this order will result in the sale of your investment if the price drops below a certain level. A trailing stop loss order can simplify a sell decision - making it more rational and less emotional. It is intended for investors who want to minimize risks, allows them to minimize losses and get the maximum possible benefit. With a trailing stop loss order, everything happens automatically, so neither you nor your account manager need to constantly monitor the price of the asset.

Steps

Part 1 of 2: Trailing Stop Loss

1 Learn how a trailing stop loss order works. A trailing stop loss is a type of sell order that is automatically adjusted following fluctuations in the exchange rate. Basically, a trailing stop loss order changes as the asset price rises. For example:
- You bought an asset for $ 25.
- The asset value rose to $ 27.
- You have set a trailing sell stop loss with a trailing value of $ 1.
- Even if the price increases, the trailing stop (the price at which the asset will be sold) will remain $ 1 below the current price.
- The asset price reached $ 29 and began to fall. The trailing stop loss will be $ 28.
- When the price hits $ 28, your trailing stop loss order will turn into an exchange order and the asset will be sold. At this point, your profit will be fixed (provided that there is a buyer).
2 Learn what a traditional stop loss is. A traditional stop loss is an order designed to automatically limit losses. Unlike a trailing stop loss order, it does not follow or adjust to changes in the price of the asset.
- A traditional stop loss order is set at a specific price and does not change. For example:
- You bought an asset for $ 30.
- You have set your traditional stop loss at $ 28. In this case, the asset will be sold for $ 28.
- If the price rises to $ 35 and then suddenly drops, you will still sell it for $ 28. Thus, you will not save the potential unrealized profits that you earned from the recent price spike.
3 Find out how a trailing stop loss order can help you maximize profits. Use a trailing stop loss order instead of selling the asset at a predefined price. When the price of your investment increases, the order will automatically change.
- Suppose that with a traditional stop loss order, you decide to sell an asset worth $ 15. You have placed a pending sell order (for example, at a price of $ 10), which will not change, and the stop loss is at $ 13.5. If the asset value rises to $ 20, the $ 10 asset sale level will still be active. If the value of the asset falls, you will sell it for $ 10. If there is a correction to the 13.5 level, the stop loss order will be executed.
- Suppose that with a trailing stop loss order, you decide to buy an asset worth $ 15.Instead of a traditional stop loss order (for example, $ 13.5), a trailing stop loss order can be set at 10% of the current price. If the value of the asset rises to $ 20, the stop loss will be executed if the price drops by 10%. This means that your stop loss order will be filled at $ 18 (10% less from $ 20). If you had used a traditional stop loss order, it would have been filled at $ 13.5 and you would have lost the profit you earned from the growth of the asset.
4 Use a simple proactive strategy. With a trailing stop loss order, you or your account manager do not have to manually change the values to execute the order. The trailing order will be changed automatically based on the value of the asset. A trailing stop loss order is fairly easy to place.

Part 2 of 2: Setting a Trailing Stop Loss of an Oredra

1 Find out if a trailing stop loss order is available to you. Not every broker allows you to use this strategy. In addition, a trailing stop loss order is not available on every account type. Find out if the broker has the option to use a trailing stop.
- We strongly recommend that you have this type of order in stock.
2 Analyze the historical data of a specific asset. It is very important to understand the historical volatility and price movement of an asset. This way you can determine the range of price movement for a certain period of time. Use this information to determine a reasonable moving value. You need to find a balance between allowing profits to grow and not closing deals ahead of time.
3 Decide when you want to place the order. A trailing stop loss order can be placed at any time. This can be done immediately after the initial purchase, or you can first analyze the movement of the asset and place a trailing stop loss order later.
4 Select fixed or relative value. As mentioned earlier, a trailing stop loss order can be created in two ways: by setting a fixed price or using a relative value as a percentage.
- For example, you can define a fixed dollar amount (for example, $ 10) or an asset value as a percentage (for example, 5%). Be that as it may, the moving price is set relative to the value of the asset. With a change in the price of an asset, this value also changes.
- By choosing a fixed dollar value, you limit losses according to the strict dollar value, to which the asset price can fall after a spike before the sell order is automatically filled. The price value cannot have more than two decimal places (without thousandths).
- By choosing a percentage value, you can determine the appropriate range for the rise and fall of the price in an overall uptrend. The value must be between 1 and 30% of the current price.
- Be aware of the risks. Whatever stop loss you set, the price can change at any time. There is always a risk that the trend will change. That is, at first the price may fall and your pending sell order will be activated, and after that the trend will change, as a result of which the stop loss will be reached and you will incur losses.
5 Determine a reasonable sliding value. Determine what value your trailing stop loss order will have. Check with your broker to determine an appropriate dollar or percentage value for your stop loss order.
- By setting a value too narrow, you risk making a sale prematurely.
- If you set the value too wide, then you will lose potential profit if the value of the asset begins to fall.
6 Indicate whether you need a day or GTC (Good Till Cancel) pending order. A trailing stop loss order can be daily or pending. The difference lies in the duration of the trailing stop loss order.
- A daily order is an order to buy or sell a security / asset, which is executed or automatically canceled within one trading day. If you place a daily order when the market is closed, it will continue until the close of the next day of trading.
- A GTC pending order usually lasts for 120 days. In other words, it will be canceled after 120 days. There are pending orders with unlimited duration.
7 Choose between a market order and a limit order. A market order is an order to buy or sell an investment at the best current market price. A limit order allows you to set the purchase or sale of an asset at a certain price, different from the current one.
- When the buy or sell price that you specified in the trailing stop loss order is reached, place a market or limit order by selling the asset.
8 Market order is the default order. It will be executed regardless of the price.