Trailing Stop Loss: A Beginner's Guide
In the world of trading, risk management plays a pivotal role. One popular risk management tool is the trailing stop loss.
This article explores the concept of the trailing stop loss and its workings.
Understanding the Trailing Stop Loss
A trailing stop loss is a type of stop-loss order that adjusts itself with the price of a security. Essentially, it allows you to help protect your profits. :
As the price of the security rises, the trailing stop moves up, locking in your profits. Despite their usefulness, trailing stops come with their share of drawbacks.
They can be triggered by sudden and unexpected price drops and can be more costly and difficult to manage than other stop-loss orders.
Trailing Stop Loss vs. Other Stop Orders
Stop orders play a crucial role in trading, and trailing stop loss is just one of them. Traders also frequently use stop-loss orders and stop-limit orders.
Stop-loss orders execute at the next available price once the market price of a security reaches a specified level. On the other hand, stop-limit orders only execute if the market price can be filled at or better than the specified price.
Each of these order types has specific use-cases:
Protecting Profits: Similar to trailing stop orders, you can use a stop-loss order if you want to protect your profits when a stock's price is falling.
Limiting Losses: To limit losses, place a stop-loss order at a lower price than the purchasing price.
Remember, stop orders are not guaranteed to execute at the specified price, especially in fast-moving markets.
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