Online traders are constantly looking for ways in which they can reduce their investor losses. One of the most common ways of them all is the stop-loss order. It is the most common downside strategy. Here you can share price dips to a specific position where the shares are sold automatically at the market price to prevent further losses. Traders can improve their efficiency of stop-loss by pairing it with a trailing stop. It’s the trade order where the price is not fixed to a single amount but rather a percentage or amount under the market price. Trailing stop loss can help you manage all your investments to reduce risk. It’s an order that moves with the market, and buying or selling is done when the price reaches a certain level.
The trailing stop loss combo is designed to reduce your losses against a sudden drop in the stock price. These also allow you to have a profit when there is an increase in the market value. For calculating the trail stop losses, you need to know how many shares you need to buy or sell and at what percentage above the market price. Trailing stop loss is an order that moves according to the market and buys and sells when the market reaches a certain point. This type of stop-loss prevents you from losing unnecessary money when the investment starts to drop.
If you sense prices going up, then you can take advantage of the growing trend. But if you don’t understand the concept completely, then you won’t benefit enough. Trailing stop losses are an essential part of the investment as they provide ways by which the investor can make money with both rising and falling markets. They protect you from significant losses in case the price of the stock drops too low. The trailing stop loss combo can help you make a profit in three ways:
- They help you earn maximum profit from your investment. If you set your trailing stop loss at 20%, the market keeps rising, and it reaches up to 100%. Then you will get triggers to sell those stocks no matter how high or low the profit is. This simply means the traders can take advantage of the market without constantly watching the market.
- They help you prevent losses from falling stock prices. For instance, if you have a price drop of 80%, your order will trigger when the depth reaches its 100% level. This means the investor will wait till the stock gains 0% to sell; hence the investor might lose money.
- The trailing stop loss combo makes it easier to make a profit on your investment. If you set your trailing losses at 20% and the stock reaches a 100% drop down, your order will trigger once they get 120%. Here the traders will make a profit without watching the market constantly. This is not possible with any other social trading tools.
The retailing stop-loss orders are usually expressed in percentage. It can be easily subtracted by subtracting the current price by the selling price point. For example, if you want to sell your shares at 20%, no matter the current price of shares, you will subtract the current cost from the selling price. If you have 120 shares worth $25 per share, and the trailing stop loss drops by 20% or more, then. Trailing stop loss= ($25-($25*.20)/0.80), which will give you a rounded figure of $23. Here, the following stop loss will automatically set your selling price to $23 or below. While calculating the stop loss, you should make sure what percentage you want to set it as. Make sure the price is below or equal to 100%. If your number is more than 100%, then the price will not work correctly for you, or you might end up losing more money, i.e., before enough price drops. Once you have figured out how many shares you want to buy, set the trial loss order of that amount within a few percent. Do remember, the prices will not be calculated automatically if it’s more than 100%. Hence you will have to make calculations of your own.
What Is The Purpose Of Using Trailing Stops?
Trailing stop loss can be defined as a modification of the stop loss, which is stated in the form of a percentage from the stock’s current market price. For holding a long-term position, the trader will have to set the trailing price below the current market price. For short-term positions, the investors will have to place the stop loss above the current price. A trailing stop loss is designed to protect gains by enabling open trade as long as the price moves in favor of the investor.
Trailing stops only move in the condition when the price moves favorably; once it moves to lock the profit or reduce loss, it doesn’t move in the opposite direction. Trailing stop loss combos are more flexible than fixed stop-loss orders, as it tracks the stop loss direction and does not require manually setting the price as fixed capital. Investors can use trailing losses for any assets, as the broker provides order type for the traded market. These stops can be set as a market order or limit order. When there is an increase in the security price, the trailing stop loss increases; when the price further becomes constant, the trial loss also becomes constant and gets automatically dragged to a position where it protects the investor downside while locking the profits. Several online brokers work to provide these services at no additional costs.
Traders and investors use trailing stops to enhance their efficiency with stop loss, where the stop loss prices are not fixed at a particular price. Instead, they are set by the specific price below the market price, which continuously moves as per the market movements. Trailing stop losses can be easily used with stocks, options, and exchanges, supporting traditional stop-loss orders. Trail Stop losses are used in many situations, but some of them are:
- The investor can stop loss with the broker if they have to invest in software with such a facility. Here you can put the stop loss manually. But the traders here are required to pay attention to their investment to avoid troubles.
- When the traders convenience themself with inevitable losses, they observe a fall in the percentage of the instrument used. Also, when the market price rises, they will benefit from the gains simultaneously, taking precautions from heavy losses.
What Are The Examples Of A Trailing Stop?
Let us consider an example of an investor who buys 250 shares of XYZ shares at $ 70 per share. Suppose the trader places the stop loss at 15% so that when the price of the shares falls by 15%, i.e., at $11, the stakes get automatically sold off. Also, when another trader expects the price of the XYZ share to rise, some uncertain conditions can make the market go against your expectations.
In such cases, the trailing stop loss would allow the investor to limit the loss by 15% of the actual investment. This helps the investor to prevent heavy losses. On the contrary, if the price of XYZ shares rises to 120 per share, the trailing stop loss will set the market price below 15% of $120, i.e., $18.
What Are The Cautions To Be Aware Of?
One of the basics to know while investing with stock is placing an order using various available tools. One of the most important tools with stock is to stop loss. Here are a few things to take care of while making trail stop loss:
- Know your stop loss
While buying stocks, you expect a certain kind of rise in the price of your share. However, in short-term trades, the market fluctuates due to several factors. Stop losses help you protect yourself from those losses. With the help of stop-loss, you instruct your broker to sell the shares automatically when the claim price reaches a certain level. The level is usually lower than your actual investment in the share. In this way, you don’t even need to observe the shares continuously.
- Deciding your stop loss
There is no set price for stop loss. These prices differ from share to share. They vary due to the fluctuations in the different shares. You here need to consider the vitality of the claim from support and resistance levels. Also, remember that the duration of your investment in short-term trade usually has a small threshold during the sale. At the same time, long-term traders generally set their stop loss to 10-15%. They typically put their stop losses by 2-5%.
- Poor behavior
Poor behavior itself is a stop loss. You can use any type of stop-loss with a broker’s observation and ensure that the trade moves according to you.
- Execution
Another caution is to be taken while executing the stop loss. This is highly applicable to liquid stocks. You here also need to make sure that the trailing stop is at its proper position.
- Backtesting
As we all know, the past cannot predict the stock’s future; hence trailing stops have worked better in the past for the work not necessarily going in the right direction.
What Is A Good Percentage For A Trailing Stop?
There are many recommendations about good percentages for trailing stops. Several blogs recommend 8%, 10%, or 20% of trailing stops. But this is the minor smart way you should have ever used trailing stop percentage determination. When thinking about a percentage, it’s just a random value that reflects nothing but a price point you need to pick. But is it okay to use the same percentage every time? Not, you should change your percentage determination with the increasing risk or profit determination.
Here arises a question, when to change the percentage? You should look ahead to change your percentage after making a detailed analysis of the moving average. Moving avenges are the starting point of the brokerage to determine the online trail stop percentage to be used by the traders. Unless you become a full-time chartist and monitor every move of the market, you would require the help of experts for determining the Trailing stop loss percentage. For determining the best trailing percentage, you need to observe the historical data of the chart. This would cover approximately 1200US stocks over 30-35 years. After this, you will move on to other types of trailing orders, stop loss, moving intermediate stops, and also Parabolic SAR.
The best of trailing stops lies in between 15-25%. The percentage range yields the best return ratio with a maintainable profit trade and wins rate. The trailing stop between 15-25% gives the most stable equity curve.
Which Trailing Stop Works Best?
The trailing stop works the best when:
- The risk-return ranged around 20% and was further followed by a 25% trailing loss.
- When the average profit per trade ranges about 50%, trailing stops.
- When the most extended trade provides the most minor or slow equity growth.
- When you do not perform with a low return to the risk score.
- When the moving average does not affect the need for improvement.
- The overall 10%, 15%, 20%, 25%, and Parabolic SAR works as the best trailing stops.
Select The Best And Leave The Rest
Percentage stop trials are the best for capturing the upward trend in stocks with limited risks. It allows the traders to set a predetermined set of percentages that will help protect them from future losses. They are highly efficient in managing the risks with trade. With rising or fall in the financial instrument, there incurs a change in the trailing stops too. While making a long-term trade, there is a fixed set of prices below the market price. Hence puts a particular amount of loss that a trader can suffer. The trading tool allows one to make a profit unless the market is against the trader.
Also, Read some Engroosing Information About Everything You Need To Know About The Psychology Of Trading.