TRAILING STOP ORDER
A stop order or stop-loss order that is
designed to close an open position should prices move adversely can be
trailed to lock-in profits should the market move favorably. A stop order to sell that protects a long position should only
be trailed higher as the market rallies while a stop order to buy that protects a short position should only
be trailed lower as the market declines.
When to trail the stop order and by how much are rules that should be specified as part of the trading system. In some cases, the
rules can be programmed directly into the trading platform or platform interface (when trading electronically) so that the stop
order trails automatically. Otherwise, it will be necessary for the trader to manually change the stop order price whenever a
trailing adjustment needs to be made.
Trailing a stop order is an effective way to capture a trend movement in prices. Often times, a market trends farther
than what could have been reasonably anticipated at the start of the movement so trying to predict the
end of the trend a priori risks leaving money on the table. By using a trailing stop, no prediction is made regarding the
end of the trend. The stop order simply follows the market higher or lower until such time as the market turns around and the
open position is closed by the activation of the stop order.
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Click above to watch a free 14-minute video (no registration required) that begins by describing the stop order
and then illustrates a trade, accompanied by a trailing stop order, in step-by-step detail from start to finish.
You'll see how a trailing stop order captures a trend movement all the while avoiding the emotional anguish of trying
to predict the end of the trend. The trade is based on actual prices and is taken from our futures trading course for beginners called, Commodity Trading as a Second Income.
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