How to use a Trailing Stop

What is a Trailing Stop?

A Trailing Stop is one form of stop-loss order that allows you to activate a stop-loss level which advances automatically if price progresses in your preferred direction.

Consequently, a trailing stop can assist you in locking-in profits while your spread bet remains active. This important order type removes the requirement for you to constantly track your spread bets and move your stop-losses manually. You can deploy trailing stop orders to support both long and short bets although they are not provided by all spread betting brokers. This tool is particularly effective if you have assess that the price of the underlying asset of your bet is currently advancing in a bullish trend but are nervous about activating a new long spread bet because of high market volatility.

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Advantages of the Trailing Stop-Loss

A trailing stop-loss automatically tracks the market if price moves in the chosen direction of your spread bet. However, the value of this tool remains fixed should price start to advance against your position. As such, the trailing stop-loss has the impact of retaining profits while maintaining your spread bets active for as long as possible. You will incur no commissions for using trailing stop orders. However, you must realize that stop-loss orders are not fail-safe and that you may experience slippage during times of high volatility. In addition, some spread betting brokers do not support trailing stop orders under all market conditions.

When you execute a trailing stop-loss order, you must supply two important parameters:

  • The distance between the entry point and your stop-loss.
  • The increment size that the stop-loss can advance.

Trade Example using a Trailing Stop Loss

Imagine you purchase the Daily Google at 870 – 872, with a stop distance of 50 points and a step size of 10 points.

Your initial stop-loss will be located 50 points beneath your opening price level, at 822. Google begins to rise initially and has soon climbed by 10 points recording a new spread of 880-882. Your trailing stop-loss will now automatically advance to 832 reducing your risk exposure by 10 points in the process.

Price proceeds to climb higher and a few hours later the new spread for Google is 950-952. Your trailing stop-loss would now have advanced by 8 increments so that it presently stands at 902. Your bet is now registering a strong profit with 30 points of it totally secured by your trailing stop.

The publication of a worse-than-expected US economic indicator exerts fresh pressure on the stock markets causing the shares of Google to suddenly plummet. Price quickly drops so that the offered spread falls to 885-887. However, your bet would have been closed at 902 which was the current value of your trailing stop-loss. As such, this valuable tool helped to lock-in profits during volatile market conditions.

Comparing Standard and Trailing Stop Losses

In contrast, if you had utilized just a standard stop-loss, your profits would not have been safeguarded and you could have even suffered a loss if price continued to retract. Experts advise that trailing stops are particularly effective when the price of an underlying asset is advancing in a well-developed bearish or bullish trend.

Trailing Stop Loss Order

If you ever encountered depressing situations such as the following, then you will appreciate the power of the trailing stop. Envisage that your spread bet recorded a 150 point profit initially, but then a sharp retraction occurred wiping out your entire profit plus more. You may then have been contemplating about whether you could deploy a more effective exit strategy. If so, then one based on a trailing stop-loss would well be your answer.

Important Features of the Trailing Stop Loss

Another important feature about the trailing stop-loss is that you can modify its key parameters after your spread bets have been activated. For instance, imagine that the distance of your initial stop-loss from your entry point is just 10 points and that you have not instigated a trailing stop order. Once your spread bet is active, you could then opt to execute a trailing stop-loss order by specifying, for example, a stop-loss distance of 20 points and a step increment of 5 points.

You must appreciate that the distance between your initial stop-loss will remain at its value of 10 points while the one for your trailing stop will now be 20. This situation means that if price advances by 10 points into your chosen direction, then the trailing stop will advance by 2 increments of 5 points so that its value would then match that of the standard stop-loss. Whereas, a normal stop-loss will now remain fixed at its original value, your trailing stop-loss will continue to track price if it progresses further in the direction of your spread bet.

There are pros and cons to deploying strategies based on either the normal stop-loss or the trailing one. You are well advised to expend time and energy investigating which one complies best with your objectives and aspirations. For instance, although trailing stop-losses are very effective at locking-in profits and minimizing losses they are not guaranteed and are prone to slippage, especially in very volatile markets.

Consequently, you are advised to evaluate the risk potential of every spread bet you consider opening. You should also determine the optimum position for a stop-loss in order to safeguard your capital. In addition, you can assess whether the usage of a trailing stop-loss would be more preferable. For instance, if the price of your chosen asset is advancing in a well-defined trend, then such a stop could be the ideal choice.

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