A trailing stop is a method of trading wherein the price of a stock is capped at a specific level. The trailing stop can also be triggered by slippage. If the market falls below a certain level, the stop will be triggered, closing the position with a profit. In this scenario, the stop is placed at a level that is five times the ATR value of the stock. This method is also known as a Chandelier Exit.
To set up a trailing stop order, enter the trigger price and the number of ticks to be followed. The trailing stop will stay in place until the trigger price is reached. It will then become a market order. It is important to note that a market order is not guaranteed to result in a specific price; the market price can end up below the trigger price. Therefore, the trailing stop’s percentage may change as the trigger price is adjusted.
One disadvantage of using a trailing stop order is that it does not track new support levels. It can also be difficult to pin risk to half-dollar or whole-dollar levels. It can be difficult to track the trend with trailing stop orders, but paying attention to the market will reveal patterns. With enough practice, you will find out which stock to follow and which to avoid. A trailing stop order is a valuable tool for traders.
If you place a stop too tight, you will likely lose your trade. Not only does this approach cause you to enter too many trades but it also increases your transaction costs. Also, it is not advisable for stocks with low volume because they can whipsaw like crazy. Lastly, tight trailing stops can cause you to lose money, especially if the stock price is unstable. A tight trailing stop can cost you half of your investment.
A trailing stop order limits the amount of money you lose to 5% of your total investment. It is possible to set it up with your broker or investing software. Another option is to manually place the stop. The latter is more practical for traders who monitor their investments on a daily basis. This method is not only effective in limiting losses, but it also limits gains. It can also help you make smart trades, since it limits your risk while locking in your profits.
As far as deciding the percentage of the trailing stop is concerned, there are a number of factors you must consider. A good stock example is Alphabet Inc. (GOOG) as this one is known to have minor pullbacks of five to eight percent. However, a trailing stop of only three percent may not be enough. This may be too tight and a stock that pulls back to an average of 6% or 8% may be too fast.
The use of a trailing stop is a good option if you want to lock in profits while limiting your losses. While this method is very effective, it is not for everyone, especially if you’re a novice trader who lacks discipline. Because of its risks, trailing stops should be used with caution, but they can help you protect your capital. They’re a great tool if used correctly. Just like traditional stop-losses, trailing stops have their own set of pros and cons.