Let’s say you have a daily target of earning $1000 with your intra-day trading. Once you target is reached, you could close your positions and call it a day. But then you might be missing out on the possible market upside unfolding in your absence. Here’s what to do instead of closing your positions.

Set a trailing stop (Trailing STP) order to protect your profits. This type of order is designed to automatically adjust the stop price as the market price moves in your favor. This way, if the market price rises, the trailing stop will follow, helping to lock in gains while allowing room for potential further upside.

You set it by specifying a percentage or dollar amount as the trailing distance. For example, if you set a trailing stop at 5% below the market price, the stop price will adjust upward as the market price rises, but it will always remain 5% below the highest market price since you placed the order. If the market price moves up, the trailing stop will follow, providing a buffer against potential price reversals. If the price subsequently starts to fall, the trailing stop becomes a market order, and your position is sold at the best available price.

The trailing stop allows you to benefit from upward price movements while providing a safety net to protect gains. This automated approach can be particularly useful in trending markets where prices may experience fluctuations.

Example

Let’s say you invested in SPXL, and the current market price is $50. You place a Trailing Stop order with a 5% trailing distance. If the price increases to $55, the stop price automatically adjusts to $52.25 (5% below $55). If the price then falls to $52.25 or below, the Trailing Stop becomes a market order, and your shares are sold.

It’s important to note that while trailing stops can be effective risk management tools, they are not foolproof. In rapidly changing markets or during periods of extreme volatility, prices may experience gaps, and the actual execution price might differ from the stop price. But it works wonders on a high-volume stock or ETF.

Note that trailing stops may be susceptible to “whipsaws,” where the price briefly moves against the trend, triggering the stop order and then quickly reversing direction. In such cases, a stop order with a fixed price level might avoid unnecessary selling during short-term market noise. Also, in highly volatile markets with frequent short-term fluctuations, a simple stop order might be more suitable. Trailing stops may adjust rapidly in response to short-term price movements, potentially triggering premature sell orders.

#trailingstops #protectivetrading #preservecapital #trailingstp

vanillaequity.com