Flying a plane is easy. Landing it is the challenge. Similarly, profitable trading is all about the exit. It can be hard to watch a market reverse course and wipe out all—or even a significant chunk—of the pro🌞fits from a formerly winning trade. But in a trending market, how do you know when to exit?

That's when you need a trailing stop. The trick is finding a technique that strikes the right balance between letting a profitable position run and protecting profits from a reversal without getting stopped out by the market's normal ebb and flow. This is especially important in trend-following strategies, when the idea is to follow the market as long as it's trending.

Understanding Trailing Stops

A 澳洲幸运5官方开奖结果体彩网:stop order exits a long or short position when the price hits a certain level. A trailing stop is simply a stop order that automatically follows—or trails—the market once the price of a security has initially begun moving in a favorable direction. If the market later reverses direction, the stop price will remain fixed, and the exit order will be placed if the stop price is hit.

The goal is to protect existing profits on the trade. Otherwise, if you leave only your initial stop in place or have no stop in place, a once-winning trade could turn into a loser. That's a losing strategy overall.

The concept is simple enough. But deciding where to place the trailing stop is challenging. If you set the trailing stop too close to the current price, normal price swings that don't constitute a true reversal could stop you out, leaving money on the table. If the stop is too far away, a true reversal could end up chewing up more of your potential profit than necessary—or even all of it.

The answer depends on several factors, including the time frame you're trading, the volatility of the market you're trading, and personal choice.

Types of Trailing Stops

There are several types of trailing stops, each with different ways of determining where to place stops 🐻as the market continues to move. Here are some of the🍃 most common:

• A defined percentage above or below (if short or long, respectively) the current market price, sometimes aligned with Fibonacci retracement levels in long-term trades.
• A specific dollar amount above or below the current market price.
• The average true range over n number of days multiplied by y number of days. For example, you can set a stop equal to five days away from the most recent close, with each day represented by the average true range over the past 14 days. In a trend-following strategy, this is a useful way of letting the market run without getting stopped out by normal price swings that don't amount to a change in the trend.
• A close above or below a specific moving average, such as the eight-, 20-, or 50-day trailing stops.
• Previous 澳洲幸运5官方开奖结果体彩网:support or resistance levels. For example, if the market recently found support or resistance during a healthy pullback to a certain price level, a break below or above that level would be a strong exit signal—so a stop could be placed there.
  

Trailing Stop Example

Let's say NVIDIA Corporation (NVDA) breaks to a new high at $100 and you buy. You decide you're willing to risk a 5% loss on th🌠e initial entry, so you put the first stop at $95.

The stock then moves to $110. Your position is showing a profit and you decide 10% is an appropriate trailing stop given the stock's 澳洲幸运5官方开奖结果体彩网:volatility. ♚So you set the trailing stop at 10%, which at thi♊s point would be $99 (110 - (11 × 0.10)).

As the price continues to rise, the trailing stop automatically rises with it. When the price reaches $120, the trailing stop is at $108, ensuring at the very least that you'll secure a profit of 8%.

The stock eventually closes as high as $135. At that point, your stop would be at $121.50 (135- (135 × 0.10)). Three days later it crosses🌄 below that level before🎉 closing at $118. Your stop is triggered at $121.50, so you secure a profit of 21.5%, assuming perfect execution.

It will be months before NVDA trades above $135 again, and, in the meantime, it will fall as low as about $90. If you had set a looser stop—say 20%—you would have been stopped out at $108, meaning what had been a 35% profit ended up at 8% (instead of 2ℱ1.5% with a 10% stop).

In this way, you've not only secured a solid profit with a 10% trailing stop, you've freed yourself up to pursue other prospects NVDA 澳洲幸运5官方开奖结果体彩网:trades sideways for an extended period.

Pros and Cons of Trailing Stops

The Pros

• Locks in profits: An effective trailing stop can help protect existing profits on a trade while still giving the market room to run. This helps traders stick to the adage to "let your profits run."
• Reduces 澳洲幸运5官方开奖结果体彩网:emotional trading: In addition to protecting your profits, a major benefit of using a trailing stop is that it forces traders to think clearly about their exits before entering a trade and set rules based on the resulting decisions.
• Automates risk management: Most trading platforms will let you automate basic trailing stops, so you don't have to manually adjust your stop as the market moves.
• Especially useful in trending markets: Trailing stops are most effective when used with a trend-following strategy, although they're also handy for protecting yourself in cases of false breakouts from a rangebound market.

The Cons

• Requires some understanding of technical trading: Making sound decisions in setting a trailing stop requires hard thinking about the market, as well as a basic understanding of 澳洲幸运5官方开奖结果体彩网:technical analysis. Like trading strategies in general, anyone can borrow a strategy for trailing stops. But if you don't understand its logic, it may not be appropriate for the market you're trading.
• Not suited for all market stages or time frames: Different types of exits are better suited for most 澳洲幸运5官方开奖结果体彩网:day trading strategies unless the trading strategy is limited to trend days. Similarly, swing trading by definition is not about riding a trend, so exits are likely best chosen based on price levels or other criteria—trailing stops aren't well-suited for sideways markets.
• Risk of premature exits: If the trailing stop is set too close to the current price, even a moderate surge in volatility can stop a trader out of a still-trending market.
  

The Bottom Line

Trailing stops offer a powerful way to lock in profits while letting winning trades run. By tracking the market while it moves in a favorable direction, a well-placed trailing stop ensures traders don't give back significant gains to reversals. Trailing stops also help automate exits and avoid emotional decision-making.

But trailing stops aren't always the best choice for exiting a trade. They work best in trending markets and are generally not well-suited for day trading. They are also best deployed by people with at least a basic understanding of technical analysis.