When the price reaches the set limit of $210, a stop order will be executed. The trailing stop price, in this case, is $210. The trailing stop price freezes above at the lowest price the asset reached. Then at $185, the market trend begins reversal, and the price starts to increase. The price continues to decline and is now at $200, so you decide to set a value-based trailing stop that will keep a distance of $25 above the current price ($225).Īs the price decreases, so do the trailing stop as well, maintaining its fixed distance. Let say the market is in a downtrend, and you sold the stock at $300. If you have a short position, your trailing stop will be set at a specified amount above the current market price. In the second case scenario, we’re attempting to place a trailing stop to execute a stop order following a market swing. Source: / Trailing Stop Order In An Open Short Position In this way, the trailing stop order allows you to keep accumulating profit and minimize your risk exposure when the market turns against you. If the price falls and reaches the trailing stop limit at $350, it closes the position. The trailing stop loss freezes below the highest price the asset reached. Then at $375, the price changes direction and starts to drop. Meanwhile, it’s still keeping its distance of $25 below the current market price. As the market price increases, the trailing stop increases as well. To secure part of your current potential profit, you set the trailing stop at $25 below the current price ($275). Naturally, you want to secure this potential profit but still, continue accumulating more. There was a sustained market uptrend over the last few trading sessions, and the price is now at $300. If you have an open long position, your trailing stop price will be placed at a fixed distance below the market price. Source: sec.gov Trailing Stop Order In An Open Long Position These scenarios are also useful in deciding when to execute Sell orders and Buy orders. To help you better understand how a trailing stop order works, let’s look at two trading scenarios - open long position and open short position. ![]() There is a huge difference between 20% and $20. You should always be doubly sure which one you’re using when placing an order. ![]() In doing so, it will follow the trend but still maintain that fixed distance. In this case, you place the trailing stop loss at a fixed percentage, like 20% below the market price. If the price rises to $210, your trailing stop loss will still be $20 below $210, which means more potential profit. For example, if the current market price is $180, you can set your trailing stop loss at a fixed $20 below $180. This is the idea of setting your stop loss at a predefined amount. When talking about value and percentage distances, it’s also worth mentioning decline. percentage distance just means deciding whether to place your trailing stop loss at a fixed price relative to the market price or at a fixed percentage. Long Straddle Definition and Strategies.Bull Spread – Understanding Bull Put and Call Spreads.
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