What is trailing StopLoss

Many beginner traders want to know What is trailing StopLoss ?

A popular protective stop-loss tool used by many traders to protect gains and limit losses automatically is the trailing stop. With a trailing stop order, you set a stop price as either a spread in points or a percentage of current market value. The trailing stop offers a clear advantage in that it is more flexible in nature than a fixed stop-loss.

It is an attractive alternative because it allows the trader to continue protecting his capital if the price drops. But as soon as the price increases, the trailing feature kicks in, allowing for an eventual protection of profit while still reducing the risk to capital. For example, imagine you purchased 500 shares of a stock at Rs.50 per share; the current price is Rs.57. You want to lock in at least Rs.5 of the per-share profit you've made but wish to continue holding the stock, hoping to benefit from any further increases. To meet your objective, you could place a trailing stop order with a stop value of Rs.2 per share. In practical terms, here's what happens: Your order will sit on your broker's books and automatically adjust upward as the price of a common stock increases. As long as the stock keeps rising or holds relatively steady, nothing happens. However, if it turns south and hits your trailing stop, your broker sells and you pocket your profit. It is important to note that the trailing stop only goes up-it never goes down with a market price. At the time your trailing stop order is placed, your broker knows to sell the stock if the price falls below Rs.55 (Rs.57 current market price - Rs.2 trailing stop loss = Rs.55 sale price). Imagine that the stock increases steadily to Rs.62 per share; now, your trailing stop order has automatically kept pace and will guarantee at least a Rs.60 sale price (Rs.62 current stock price - Rs.2 trailing stop value = Rs.60 per share sale price). In other words, the trailing stop order will increase in your favor and lock in any gains you've made in the interim. If the stock were to fall to Rs.60, your trailing stop order would convert to a market order for execution, and your shares would be sold and should result in a capital gain of Rs.10 per share. This method of protection eliminates the need to continuously monitor prices and constantly adjust the stop level after prices increase. The stops will simply be adjusted for you as the prices increases. In the preceding example, once the stock turns lower by Rs.2 or more you are automatically stopped out.

The difficulty with trailing stops and the reason I do not normally recommend them is knowing how much leeway to give yourself. Frankly, the fault with this system is that the decision on how much the stops should be below the most current price is usually totally arbitrary and lacking in technical reasoning. Yes, the normal stop set below a logical support or confluence of several support points takes more work, but in my experience after nearly 50 years trading, it's much more accurate and worth the time you have to spend analyzing the technicals looking for the technically logical points to set your stops. However, in any case, my philosophy is that a stop of any kind-be it based on technical analysis of support points or arbitrarily set trailing stops-is better than no stops at all or even "mental stops," which totally rely on your discipline and ability to pay close attention to price movements and require you to monitor prices constantly.

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