Trailing stops are a form of stops that can come in handy if you wish to avoid having to adjust stop loss orders continually as the market moves. Trailing stops are as such a risk management tool that allows you to manage your risk without restricting your potential profit. The trailing stop loss function allows you to set an automatic instruction to move your stop loss as your position moves further into profit. Trailing stops permit you to lock in gains as your trades move into profit territory.
For example, if you initially set your stop loss at 30 points away from the price you entered at, you can also set a command for the order to follow (or trail) your position into profit.
Example:
Long trade entry in BP stock at 405p with stop at 375p.
If the price of BP stock rises to 430p, you can set in a trailing stop at 410p, with an instruction to follow the price upwards at a distance of 20 points. Thus in the scenario that BP continues to rise to 490p and then retraces rapidly to 440p, your stop would be taken out at 470p, locking in a gain of 65 points.
This is a great way to protect profits and it means that you don’t have to continuously think about monitoring your position and moving your stop manually. You can also choose the frequency that it moves, for instance, if you select the trailing stop loss to 1 you are instructing the platform to move your stop loss up to sit 30 points below the price of the market permanently, every time it moves 31 points in your favour. So as you can see stops can be equally used to protect profits and not just to mitigate negative losses and this quality can come in useful in a volatile market.
