The Difference Between A Stop-Loss and A Trailing Stop - Advanced Forex Strategies

The Difference Between A Stop-Loss and A Trailing Stop

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Many people have investment portfolios, but few of us have the time to micromanage all of our investments. Unless you’re a professional, retiree, or someone in a similar position, you likely won’t have enough time to keep an eye on all of your stocks and other assets all of the time.

Luckily top notch trading software and brokerage firms can offer a variety of solutions to help you manage over your trading accounts even when you don’ have your eye on them. There are now a wide range of automated tools and bots that you can use to automatically monitor over your stock portfolio and other financial investment vehicles.

“Stops” are one such way to monitor over your account. When you place a stop on your stocks, your broker will automatically sell the stocks as soon as they hit the stop price. For example, if you buy a stock for $15 dollars, you can set the stop price to automatically sell the stocks at $12.50.

Another option is to set a trailing stop, which is based on the same principle but is slightly different. With a trailing stop you don’t set a specific price but instead a specific percent, so when stocks drop by that percent, the stop-loss is triggered and the stocks are sold off.

Stop Loss and Trailing StopSo let’s say you again buy shares at $15 dollars. Now you can set a trailing stop to automatically sell the stocks if they drop by 10%. So if shares drop from $15 dollars to $13.50 the shares will sell off. If shares rise to $20 dollars and then suddenly drop to $18 the stocks will also sell.

Under most circumstances we wouldn’t recommend you actually set a trailing stop at 10% as a 10% fluctuation is actually not that substantial within stock markets. Of course, we’ll leave it to you to decide your own individual trading strategies, but many traders prefer to set their trailing stop loss at a higher percentage, say 15% or 20%.

Why You Should Consider Setting Up A Stop-Loss

Let’s be honest, life can get busy. We all want to manage over our stock portfolio day-to-day, but fact is most of us have jobs and other commitments. This means we can’t constantly watch over our portfolios. Automated tools, like a stop-loss or trailing stop loss can help us protect our portfolios even when we’re not watching them.

Another great idea is to set up a limit order for a stock you want to buy. With a limit order you set a price at which to buy a stock and your broker will only execute the trade if the stock drops to that certain point.

Let’s say you want to buy some shares in Acme Motors that are trading for $12.50 right now. You’re confident that shares will drop below $12 in the trading day but don’t have time to monitor the shares closely. So why not set up a limit order to execute the trade automatically if prices drop below $12 dollars. You can also use limit orders to sell at a given point.

In fact, you can actually combine the two. You can set up a stop limit order to execute a trade, and then set up a limit order to buy or sell the stock again when prices reach a certain point. For example, you can set up a stop loss to sell Acme Motors shares at $12.50 and then rebuy shares when they hit $10 dollars.

As you can see there are many options when it comes to automated trading. Make sure you consider all of them because tools like a stop-loss can really make it easier to manage your portfolio.

via The Difference Between A Stop-Loss and A Trailing Stop

 


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