Trailing Stop Loss

Trailing stop loss is a type of stop loss order which you set near the market price. When the price is moving away from your stop loss, you move it proportionately following the price.

You can use this technique both for buying and selling stocks.

When you have already bought stocks and you want to use trailing stop loss for further sell, you start with setting a stop loss a little below nearest support. Then you wait. Let’s assume stocks are going up. Then you should constantly raise the level of your stop loss, moving it behind the stocks price. Of course it is best to set it near new supports. This way your risk is on limited level, while you don’t limit gains.

You can apply analogous strategy, when you want to use trailing stop loss to buy. You follow falling stock price with your limit order (you buy automatically, when price raise across your limit). When the price will change direction to upward and cross your order level, it will trigger buy. Therefore it is good to place this order slightly above the nearest resistance. Breaking this resistance can be a good signal for further gains. However, I don’t recommend this method for opening positions especially if you are beginning investor. It is very difficult to catch falling knives.

The advantage of trailing stop loss is pretty obvious. You reduce risk by protecting your capital, while there are open possibilities for theoretically unlimited gains.

The disadvantage of this method is difficulty to use it on volatile stocks. Dynamic price movement can accidentally trigger your stop loss order, which was set too close.

Now I advise you to open some stock charts and start following price movements with trial stop loss orders. Do this on different stocks. See how it could work; look for traps, like setting it too close or using it on volatile stocks. With a little time you will get a lot of sense how to use trailing stop losses in the way that your capital would be safe and there would be good chances that you gain.