What is a trailing stop?

A stop loss order is an order that says: ‘if the price of this stock falls below $xxx, sell my shareholding”.  So a trailing stop loss is an order that serves the same purpose but which is also moved up (or down for short positions), either manually or automatically, under (or above) the share price as prices move higher (or lower).

Using a trailing stop loss is a useful tool for both traders and investors as they can:

• minimise losses as the trailing stop moves closer towards the entry price
• lock in profits if the trailing stop is above the entry price
• lets your winners run
• protect your capital

Should you use a trailing stop?

Whether or not you want to use a trailing stop will depend on what type of trader or investor you are and how you decide you want to manage your open positions – the decision will come down to your personal choice.  There is no right or wrong answer here just as there is no right or wrong method to use

What types of trailing stop methods are there?

There are a number of trailing stop methods that you could use  We’ve just briefly listed three here:

• percentage based – if price falls x% below the most recent high exit the position
• volatility based – if price falls by x times a measure of volatility (usually Average True Range) below the most recent high exit the position
• dynamic – if price falls below the Δ Zone (as indicated by the Trailing Alerts section on the Watchlist pages in the Trading Edge Dynamics platform) exit the position

Of course, we at Trading Edge Dynamics suggest that the best type of trailing stop is the dynamic one – the Trailing Alert that is calculated for each and every stock in a members watchlist and which is based on the Delta zone (Δ Zone).

The chart below shows the dynamic trailing stop for AGL Energy Limited (AGL) from a bullish alert triggered in late September 2016 until mid May.

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