Use Trailing Stops To Secure Your Profits

A trailing stop is one of the best features you can add to your trading money management plan

. Not everyone however truly understands how it can help lock in investment profits. For you to gain a deeper appreciation of the concept, it is first important to get a glimpse of how a lot of traders typically respond to a profit scenario.

In the stock market, profits don't always come through in long, generous gushes. There are times when there are only gradual gains over a certain period of time. Moreover, there is always a possibility that the following day will lead to drops. This is what scares a lot of traders who don't have trading stop orders. They get so nervous about losing their small profits that they tend to exit trades as soon as they see those small gains come in.

Strictly speaking, leaving when you've just won a bit isn't an entirely bad idea. In stock trades however, exiting too soon can possibly mean that you might lose out on profit potential. There is always a chance that a trend will continue to climb in which case you will have lost the opportunity to benefit from the continuing rise. It is therefore more sensible for you to ride the trend till it starts to move down. The all important question though is: How can you tell when you've just reached the top and you need to get out before the long dive down?

Since it is hard to determine the top of a trade, you have to make sure you implement a trailing stop order. If you don't have the time, expertise and technical tools to evaluate trends and exit timing, trailing stops are your next best options to make sure you don't lose what you've gained.

A trailing stop is called so because it rides close behind a rising value. As price climbs, so does your stop order. It remains in the same position though as soon as values start to go down. When prices hit the now static stop order, you can make an exit from the trade. A trailing stop is therefore a handy signal that can tell you when the best time is to leave.

The importance of trailing stop orders should be obvious. By allowing you to hold your position, you are given the opportunity to enjoy a rising asset for as long as it is on the rise. This kind of stop order will only signal you to leave when you start losing a bit of what you've already gained. You never come out a loser because you've already made profits that are only nipped a bit at the point of exit.

You can arrive at your exit point through different ways. You can make computations based on the average true range, lowest low, technical and percentage methods. Of these four, it is the percentage method that is the easiest to compute for. One main disadvantage of it is that it doesn't give due thought over price action and volatility.

A trailing stop is obviously valuable. Consider computing for one now. Even if you are great at analyzing trends, a trailing stop can give you the necessary cushion in case you are wrong about the position you've taken.

by: Reece Mathews

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