What Is a Trailing Stop Loss?

A trailing stop loss order is an investment strategy that sells a stock automatically when the share price falls by a predetermined percentage. Because it’s a flexible way to manage your risk, it’s great for new investors and seasoned investors alike. This tool offers many benefits, including a no-cost alternative to a stop-loss order and the ability to stick to a predetermined plan of action. It also limits your losses to 5% of your original investment, thereby protecting your investment portfolio.

Trailing stop losses help you capitalize on stock market momentum and movements. By setting your trailing stop to a certain percentage, you can sell the stock at a preset price based on its trend. You can choose the trailing stop limit based on your risk tolerance and your investment expectations. In addition, trailing stop limits are calculated by keeping the trailing stop percentage constant even if the investment price changes. This method is particularly useful for investors who don’t want to lose money on the stock.

A trailing stop loss is one of the most popular risk-management strategies. This method prevents you from taking unnecessary risks and maximises the profits you’ve already made. Trailing stop loss orders work by setting your stop price at a certain percentage below the current market price. If the price of your investment drops by 10%, your trailing stop will trigger a sale of your stock. This way, you won’t have to watch it constantly.

A trailing stop loss is an excellent option for traders with several positions. The trailing stop will protect your investment from loss of capital and will lock in profits when prices rise. This strategy is particularly useful for scalpers, as it helps protect against sudden increases in volatility. Moreover, you won’t have to manually reverse your stop loss order, and you’ll get to manage your positions in a fraction of a second. In addition, the trailing stop works for both options and futures.

When using trailing stop losses, you should carefully consider the volatility of a particular stock and its historical volatility. If you put your stop loss too close to the market price, you risk an early exit. Similarly, setting it too far away may mean that you risk more capital than you would have if you were to wait. The best way to set a trailing stop loss is to place it below the market price, and above the market price if you’re shorting a stock.

Another good way to use trailing stop losses is to use an ATR or MA as a guide. These are lagging indicators, meaning that they don’t react immediately to sudden price movements. ATR values of at least three are a good guide to use when setting a trailing stop loss. In general, however, you should use 15% to 20 percent of your trading capital, but make sure you don’t go beyond this.