Protect Your Trading Profits with Trailing Stops

Mar 3, 2013 -

Use trailing stops to maximize your trading profits

When limiting your loss, most of us use a stop. What about protecting your trading profits?

In practice, some people will move up their stops when the price moves in their favor. For example, say you bought the stock at $10 and you set your stop at $7. Should the stock move up to your target of $12, you move up your stop to $10. This way the worst that can happen is you break even less commissions. You would then protect yourself from the move from $10 to $7.

But, this is a manual process and if you are trading shorter time frames like intraday, it can be difficult to keep up with changing your stop. Besides manually changing stops, how else can you protect your trading profits?

You can use the trailing stop limit or market order. The trailing stop is an advanced order that allows you to protect your profits, while letting them run. It helps to limit risk and will close out a position should the market run against you. The design of the stop is simple. It follows behind the market if the market continues to move in your favor locking in gains.

Let's take a look at an example of a trailing stop.

Say you bought a stock at $100 and you initiated a trailing stop of $10 or 10%, at the moment this means you have a stop at $90.

Bought @ $100
Trailing Stop @ $90

If the stock/option moves down immediately to $90 
then it will execute the limit or market order.

However, if the stock moves to $101, the stop will be moved up to $91. The benefit of this is that it will automatically move the stock up and keep the distance between the stock/option price and the stop of $10 or 10% as set before.

Bought @100
Trailing Stop @ $90

If stock moves to $101, 
then trailing Stop moved to $91.

Furthermore, should the stock/option move down to $99 the stop will not move to $89. The stop will only move up from the $90 should the stock/option move in your favor.

Bought @100
Trailing Stop @ $90

If stock moves to $99
then stop stays at $90.

Trailing stops are a great way to automate your trading and to take some of the emotion out of the trades. Once you've set your stops and your targets, this is one way you can limit your risk and maximize your gains.
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