How to Use Trailing Stops
The primary goal of day trading is short-term gains, while managing your downside risk. That’s obvious. The wise use of trading stops lessens your potential losses, and their use is a crucial strategy for any day trader. The trailing stop is a basic technique for determining your exit point on a particular stock. Trailing stops allow you to capture the maximum upside possibility on a trade by limiting your risk and making as much money as possible on a trade, while limiting your losses. It offers traders great flexibility, as the stop price “trails” the market price, adjusting if the share/stock price rises.
Types of Trailing Stops
Trailing stops fall into two categories. Most trailing stops use a percentage system, so you set your stop-loss order to kick in if the stock is down a certain percentage from the current market price. Set it at 10 percent, for example, and you know how much you will lose. The other option consists of the fixed price trailing stop, which uses a dollar amount rather than a percentage. This method also allows for easy calculation of a worst-case scenario in losses. While the majority of traders prefers the percentage trailing stop, use the method that makes sense for you.
Long and Short Positions
The traditional percentage or fixed price trailing stop for a long position is set at the current market price. If you’re shorting a stock, the trailing stop is set above the current stock price. Whether your position is long or short, once a trailing stop is triggered, it becomes a market order.
Trailing Stop Considerations
Trailing stops are only viable during standard market hours. At SureTrader, that’s between 9:30a.m. and 4:00 p.m, Eastern Standard Time. You can’t use trailing stops if you trade during pre-or-post market hours. However, you make the decision as to the length of time your trading stop lasts, so it is an effective tool for both day and overnight traders. Trailing stops held longer than one day do leave the trader vulnerable to any gaps in pricing which can happen between trading sessions.
Keep in mind that certain activities can inadvertently set off your trailing stop. Such activities, initiated by third parties, include:
- Symbol change
- Stock splits
- Incorrect valuation
- No bid or ask price – if there is no bid or ask price currently available, the trailing stop won’t trigger
If the trailing stop triggers at a period of high market volume, it’s possible that the routed execution price is not the same as the actual execution price.
The SureTrader Advantage
A trailing stop is only as good as your brokerage’s computer system. Our state-of-the-art software ensures your trailing stop orders take place the second you execute them. SureTrader’s intuitive, easy-to-learn platform makes choosing and executing a trailing stop order very simple. At SureTrader, we offer lightning-fast execution for any trade, and that includes trailing stops and other exit and entering strategies. Our first-rate platform is just part of the SureTrader advantage.