How to Effectively Use Trailing Stop Loss and When to Use It

Trailing stop loss is the most common type of trading stop. It varies based on the last few swing highs and lows of a stock, rather than a fixed price. Trailing stop loss can be less effective in ranging markets, which can cause the stop to be activated prematurely and limit a profit. In this article, we will discuss how to effectively use trailing stop loss and when to use it.

A trailing stop move with the stock when the price rises. The stop remains stationary when the price pulls back from the recent high. It keeps the investor’s downside protected while locking in profits as the price goes to new highs. Trailing stop service is often offered free of charge by online brokers. This feature can save you a lot of money in the long run. The main advantage of using a trailing stop is that it is more flexible than a static stop.

Many brokerages and trading software allow users to set up a trailing stop order to move their stops as the price moves. In most cases, trailing stop orders will move as the market price moves. In addition, traders may use technical indicators to guide their trailing stop placements. An average true range indicator (ATR) helps traders understand price movement and predict volatility, so unexpected volatility is not taken into account when trailing stop placements are calculated.

One disadvantage of using a trailing stop order is that it does not track new support or resistance levels. It also can’t be used to pin risk to whole or half-dollar levels. These are all important factors in any trading strategy. Remember that there are many types of traders in the market. Pay attention and you will eventually notice patterns. In the meantime, trailing stop loss is a great entry strategy and is an excellent way to lock in profits.

In some cases, it’s important to monitor the market closely. Trailing stop loss is especially useful when the price of a symbol changes sharply in the same direction. If you can’t monitor the market closely enough to adjust the Stop Loss manually, a trailing stop loss may be the best option for you. So, how do you use trailing stop loss? In short, it’s a compromise between a stop loss and a profit booking.

Trailing stop loss works by following a certain amount. Then, when a stock price moves higher, the trailing stop loss orders will follow along. Basically, the trailing stop loss follows the stock. If the stock rises by $10, the trailing stop loss orders will move upward by the same amount. In this case, the stock price rises to $102, so the trailing stop loss would be $92. If it falls below the trailing stop loss order, it will trigger a market order and the trader will receive his profits.

While there are a few exceptions, it’s best to set a trailing stop loss based on the stock’s historical performance and market conditions. Generally, a stop loss that’s too close to the market price could force you to exit a trade early and risk more money than necessary. For buy trades, you want to place your trailing stop loss below the market price, while a trailing stop loss above the market price will prevent you from exiting the trade at a profit.