What is a Trailing Stop Loss?
Trailing stop losses are stop loss orders in which the price involved is set at a predetermined percentage that is less than the current market price. The beauty of the trailing stop loss is that if the market price increases, the stop loss order price will increase in proportion to the change in market price. But if the market price should decline, the trailing stop loss price will remain the same. The use of a trailing stop loss is a great benefit for the investor. Utilizing this approach to investing means that the investor is able to establish a limit on the degree of loss that it is possible to incur. At the same time, the ability of the trailing stop loss to adjust upward when the market swings upward means there is no limit at all on the potential to earn a return. This means the trailing stop loss approach minimizes the chances of loss but does not inhibit the ability to increase the value of the investment portfolio at all. Another advantage of a trailing stop loss is that the
Basically, a trailing stop loss involves the moving of your stop loss level as your trade progresses in your favour. For example, when you buy a currency pair and the price moves up 30 pips, your stop loss level (which was initially 30 pips below your entry price) is then moved to your entry price, ensuring that you won’t lose any money. When the market rice moves a further 30 pips higher (a total of 60 pips above your entry price), your stop loss level will be positioned at 30 pips higher than your entry level. However, when prices start moving against your favour, the trailing stop loss does not shift. 2 Types Of Trailing Stop Loss Trailing stop losses can either be placed manually by the trader, or automatically placed by a trading platform. Manual trailing stop losses are typically placed at prominent support/resistance levels, especially below previous swing lows or above previous swing highs. It is up to the individual trader to determine where to place the trailing stop loss. A
Imagine the investor bought shares at 100p, and the price increased to 150p, providing a 50% gain. The safest thing to do (assuming they are not ready to take profits) is to increase the stop loss. So, 25% below the current price of 150p is 112.5p, which is the new trailing stop loss level. Should the price fall back, the investor has still saved at least a small portion of their profit, and all of their original investment.
