What Is a Trailing Stop?

A trailing stop is a kind of trading strategy that alerts the trader when the price has fallen below a predetermined level. Traders can use trailing stops to exit a position and collect profits. However, traders should keep in mind that a small callback rate may trigger a trailing stop in the event of a significant price change. Moreover, a high callback rate can lead to a losing trade.

A trailing stop is one type of stop order that automatically follows the price movement of a stock. As long as the trailing stop remains above the current market price, it allows the trader to increase the value of his trade in the case of a rising market. In case of a falling market, it will close the position. Thus, a trailing stop will protect the trader from large losses while locking in the gains. This type of order is very beneficial to traders.

A trailing stop can be configured to use either the Last Price or the Mark Price. In both cases, the price must be above the activation price in order for the stop to be triggered. Alternatively, a trailing stop can be configured to use a trigger price. If the trigger price is above the activation price, the trailing stop will automatically reset to the new high, minus the amount that you have set for the trailing.

When choosing the correct trailing stop, traders can use technical indicators to guide their decisions. An average true range (ATR) indicator can help traders decide when to use a trailing stop. The price will fluctuate over a trading day. A screenshot of a trailing stop-loss order settings shows how the price would react if the stop is triggered below the current market price. However, this strategy is not for everyone.

Those who use trend-trading strategies often opt for a trailing stop. Trailing stop orders can be useful for those who want to limit losses while letting winning trades run. By following this method, you can limit your losses to a maximum of 1% of your initial investment and still reap a substantial amount of profits. The risk to reward ratio is approximately one to twenty, which is a good ratio for a trader.

There are two main types of trailing stop orders. One is automatic, while the other is manual. The latter is more appropriate for traders who constantly monitor their investments. In case of the former, it is possible to place the trailing stop order manually. A trader who uses a manual trailing stop should be prepared for this. If the market falls to a certain level, he should immediately exit the position. However, a more aggressive trader should use a trailing stop order.