In this article, we will discuss what a trailing stop is. The trailing stop loss is a different type of stop order. Then, the regular stop loss is different from a trailing one. Therefore, in other sections, we will discuss the difference between a stop loss and a trailing stop loss.
Stop orders are a useful tool for traders and investors. They help you get out of the position before losing your profits or your original margin. But let’s find out the difference between a stop order and a trailing one.
You can also read The benefits of using Loomi crypto.
What is the difference between stop loss and trailing stop?
With a stop loss, you choose a price and will automatically exit at that price. For example, let’s say there a stock price is $2 and you set stop loss for $1.9. Then it will automatically sell the stocks when it hits the $1.9 price point.
Trailing stop, on the other hand, won’t always sell at the exact price. The trailing stop price will follow the price in favor of the position. Then, if you have a trailing stop loss and the price moves higher, the trailing stop price will move higher.
In trailing stop, the trailing means dragging or “to be drawn.” Then, a trailing kind of stop order is a stop loss that will be drawn towards the price (in your favor).
How does a trailing stop order work?
In this section of the article, we will discuss how a trailing stop works. As we mentioned above, the price moves in your favor in a trailing stop. Traders will set a maximum loss in dollars or percentage, and it will exit the position at that max point. But the trailing stop will also change in your favor to gain more profit.
For example, in a long position, you set a trailing stop to exit at 3% of drop. The tailing stop will move higher if the price of the stock increases. And it will exit the position once you have reached 3% of losses. Then, if the price moves higher, the trailing stop loss will also move higher.
Are trailing stops profitable?
A trailing stop helps traders to close an order at a higher price. For example, let’s say the price of a stock is at $10, and you set the trailing stop at $9. Then, your maximum loss is $1 in this long position that you have entered.
Then, if the asset price rises to $13 per stock, your trailing stop order will also increase to $12. So you have gained 2 dollars even if you hit your trailing stop in this position. The trailing kind of stop loss helps investors and traders to increase their profits.
Now, let’s discuss a good percentage for a trailing stop.
What is a good percentage for a trailing stop?
Above, we have discussed a trailing stop and how a trailing stop loss works. In this section, we will discuss what a good percentage for a trailing stop is.
The good trailing stop order depends on the asset and the asset’s industry. But generally, a good percentage for a trailing stop order is between 15% and 20%. Then, if you want to set a more accurate trailing stop order, you should customize it yourself. Or, to put it simply, choose the percentage that you see fit for the trailing stop order.
Now, let’s discuss some trailing stop advantages and disadvantages. Then, you would know when it’s best to use the trailing stop order.
What are trailing stop loss advantages?
The trailing stop loss will sell once the position meets your maximum profit or loss. On the other hand, it also doesn’t stop you from gaining more. Then, if you set a trailing in a long position, the trailing stop price will increase if the price increases.
If you use trailing stop loss correctly, you can take emotions out of your trades. Then, you can trade more efficiently and thus gain more profits. You can set the trailing at any price or percentage that you want, and it won’t cost you anything. Therefore, trailing stop enables traders and investors to gain more profits in the market.
You can set the trailing stop order at any price that you want, knowing you can keep gaining. Therefore, you won’t feel missed out if the price increases before hitting your stop. Then, you would know that you will still gain profits if the price increases from now on.
What is a disadvantage of a trailing stop loss?
Trailing stop is an interesting and useful tool in many scenarios. But there are also some disadvantages to trailing stop loss. In this section, we will discuss the disadvantages of using a trailing stop loss.
First, we should discuss using the trailing stop in volatile markets. Traders can’t trade easily by trailing stop in volatile markets such as the crypto market. Therefore, it’s better that you don’t use trailing stop loss in volatile markets. Crypto is a volatile market, so it’s recommended that you don’t use trailing in crypto.
Also, you can be confused and unable to execute a decision to exit an order. For example, you can become unable to sell when the price of an asset drops and you lose profit. Then, beginners in trading shouldn’t use trailing as much because it needs practice in the market.
Another disadvantage is that some brokers and exchanges don’t allow stop-loss orders for some stocks. Then, they don’t guarantee whether you receive the price of your trailing stop or not.