Loding Loading ...
X
Century Financial Consultancy LLC ("Century") does not offer investment advisory or portfolio management services nor guarantees investment returns. We do not accept or make payments in cryptocurrency or digital currency. Our official website is www.century.ae. Beware of fraudulent companies or websites posing as Century. We are not responsible for any losses from using fake websites or entities. Trading in financial markets involves a significant risk of loss which can exceed deposits and may not be suitable for all investors. Before you start, please ensure you fully understand the risks involved.
  • AR AR
Century Financial Consultancy
  • Home
  • trailing stop-loss orders

Trailing stop-loss orders

When you're opening a trade, why not consider using a trailing stop-loss? Find out what a trailing stop-loss is and why it might be more useful than a regular stop-loss order.

What is a trailing stop?

A trailing stop is a risk-management tool. Similar to standard stop-loss orders, trailing stop-loss orders follow the price when it moves in the desired direction rather than staying at a particular price level.

The stop-loss follows the trajectory of the market price as it increases in your favor, helping to lock in any potential profit while reducing risk by capping the potential downside.

The benefits of a trailing stop-loss

A stop-loss order is a type of order which helps manage risk by specifying a point at which your trade should be closed if the price moves against you. The key benefit of using a stop-loss is that it ensures your losses are limited. Stop-loss orders remain in effect until your position is liquidated or you choose to cancel the order.

A trailing stop, also known as a trailing stop-loss, is a sort of market order that places a stop-loss percentage rather than a fixed sum at a certain amount below the market price of an asset. The stop-loss then follows the stock's price as it fluctuates.

While keeping the transaction open until the instrument's price reaches your trailing stop level, trailing stops assist in locking in profits. You can specify a distance in points or percentage from the opening price for your trailing stop-loss order. The stop-loss order will be activated, and your transaction will be closed when the market price hits your trailing stop.

A trailing stop can also be advantageous over a regular stop-loss if the market price moves in your favor but then reverses, as your stop-loss will have followed the favourable price moves but will not move in the opposite direction.

Similar to a regular stop-loss, once the instrument’s price hits your trailing stop-loss level, your trade will be closed at the next available price, preventing you from holding on to a losing trade and being at risk of losing more money.

Example of a trailing stop-loss

Say you bought a stock at £10 per share and instead of implementing a traditional stop-loss order to sell once the price drops below £9, you set a trailing stop-loss order to 10% below market price.

In this case, if the price falls to £9, the stock is automatically sold as the price has dropped 10%. However, if the share price rises, the stop-loss rises with it, remaining 10% below the market price. So, if the share price rises to £15, your trailing stop-loss also rises to £13.50. This gives an unrealised gain of £5. If the share price dropped to £13.50 at this point, your trailing stop-loss would be triggered and a profit of £3.50 would be realised.

When to use a trailing stop-loss

When trading a very volatile currency pair with irregular price movements, like in forex trading, a trailing stop-loss may be helpful. However, it's crucial to keep in mind that higher levels of volatility could lead to your stop-loss being activated sooner.

This is why the placement of the trailing stop-loss is very important, and the historical performance of the stock and market conditions should be taken into consideration. It’s important to look at the market volatility over an extended period of time, as well as how it behaves on a daily basis. Placing the stop-loss too close to the market price may result in an early exit, whereas setting it too far away would mean risking more capital.

If you’re going long (placing a buy trade), then the trailing stop needs to be placed below the market price. If you’re going short (selling), then your trailing stop-loss will be placed above the market price.

You would need to create a guaranteed stop-loss order in order to exit a transaction at a certain price as opposed to the next open market price. This is a practical method to prevent slippage.

Trailing stop-loss strategy

Trailing stop-loss placement is usually specified by setting a price the desired distance away from the market price, in line with how much capital you’re willing to risk on the trade. The stop-loss will then remain this distance from the market price while the price moves in your favour. The stop-loss moves in line with favorable price moves automatically.

Some traders might decide to employ a standard stop-loss in a manner similar to a trailing stop by manually changing it anytime they notice a price movement in their favor.

Additionally, some traders may choose to use technical indicators to direct the placement of their trailing stops. To determine how much the instrument they wish to trade moves over a specific timeframe, for instance, they could utilize Average True Range (ATR). They can see from this how much price variation they can anticipate throughout the trading day. Any considerable unanticipated volatility, such as that brought on by breaking news, would not be considered, though.

The bottom line

To summarize, a trailing stop-loss is a free risk-management tool which can help maximize your profits when trading, as well as reduce the risk of making a significant loss. As the trailing stop only moves when the market price moves in your favour, it’s an effective way to increase unrealized gains, however small.

You can define an amount you're willing to risk on the transaction or set a price or percentage deviation from the market price when it comes to placement. A trailing stop-loss secures the upside and guards against the downside.

Source: CMC Markets UK

Disclaimer: Century Financial Consultancy LLC (“CFC”) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA). This document is a marketing material and is for informational purposes only and must not be construed to be an advice to invest or otherwise in any investment or financial product. CFC does not guarantee as to adequacy, accuracy, completeness or reliability of any information or data contained herein and under no circumstances whatsoever none of such information or data be construed as an advice or trading strategy or recommendation to deal (Buy/Sell) in any investment or financial product. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part.

PLEASE READ THE FOLLOWING TERMS AND CONDITIONS OF ACCESS FOR THE PUBLICATION BEFORE THE USE THEREOF.

By use of the publication and continuing to access the publication, you accept these terms and conditions and undertake to be bound by the acceptance. CFC reserves the right to amend, remove, or add to the publication and Disclaimer at any time without any prior notice to you. Such modifications shall be effective immediately. Accordingly, please continue to review this Disclaimer whenever accessing, or using the publication. Your access of, and use of the publication, after modifications to the Disclaimer will constitute your acceptance of the terms and conditions of use of the publication, as modified. If, at any time, you do not wish to accept the content of this Disclaimer, you may not access, or use the publication. Any terms and conditions proposed by you which are in addition to or which conflict with this Disclaimer are expressly rejected by CFC and shall be of no force or effect.

No information as given herein by CFC in this publication should be construed as an offer, recommendation or solicitation to purchase or dispose of any securities/financial instruments/products or to enter in any transaction or adopt any hedging, trading or investment strategy. Neither this publication nor anything contained herein shall form the basis of any contract or commitment whatsoever. Distribution of this publication does not oblige CFC to enter into any transaction.

The content of this publication should not be considered legal, regulatory, credit, tax or accounting advice. Anyone proposing to rely on or use the information contained in the publication should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts regarding information contained in this publication. CFC cannot be held responsible for the impact of any transactional costs or any taxes as may be applicable on transactions.

Information contained herein is based on various sources, including but not limited to public information, annual reports and statistical data that CFC considers reliable. However, CFC makes no representation or warranty as to the accuracy or completeness of any report or statistical data made in or in connection with this publication and accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained in this publication. The articles does not take into account the investment objectives, financial situations and specific needs of recipients. The recipient of this publication must make its own independent decisions regarding whether this communication and any securities or financial instruments mentioned herein, is appropriate in the light of its existing portfolio holdings and/or investment needs.

This document is a marketing material and has been prepared by individual(s), marketing and/or research personnel of CFC. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is purely a marketing communication. In this publication, any opinions, news, research, analysis, prices, or other information constitute is a general market commentary, and do not constitute the opinion or advice of CFC or any form of personal or investment advice. CFC neither endorses nor guarantees offerings of third party, nor is CFC responsible for the content, veracity or opinions of third-party speakers, presenters, participants or providers. CFC will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

Charts, graphs and related data or information provided in this publication are intended to serve for illustrative purposes only. The information contained in this publication is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to their determination. All statements as to future matters are not guaranteed to be accurate. CFC expressly disclaims any obligation to update or revise any forward-looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events.

Staff members/employees of CFC may provide/present oral or written market commentary or analysis to you that reflect opinions that are contrary to the opinions expressed in this research and may contain insights and reports that are inconsistent with the views expressed in this publication. Neither CFC nor any of its affiliates, group companies, directors, employees, agents or representatives assume any liability nor shall they be made liable for any damages whether direct, indirect, special or consequential including loss of revenue or profits that may arise from or in connection with the use of the information provided in this publication.

Information or data provided by means in this publication may have many inherent limitations, like module errors or lack accuracy in its historical data. Data included in the publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, credit risk etc.

The use of our information, products and services should be on your own due diligence and you agree that CFC is not liable for any failure to achieve desired return on investment that is in any manner related to availing of services or products of CFC and use of our information, products and services. You acknowledge and agree that past investment performance is not indicative of the future performance results of any investment and that the information contained herein is not to be used as an indication for the future performance of any investment activity.

This publication is being furnished to you solely for your information and neither it nor any part of it may be used, forwarded, disclosed, distributed or delivered to anyone else. You may not copy, reproduce, display, modify or create derivative works from any data or information contained in this publication.

Services offered by CFC include products that are traded on margin and can result in losses that exceed deposits. Before deciding to trade on margin products, you should consider your investment objectives, risk tolerance and your level of experience on these products. Trading with leverage carries significant risk of losses and as such margin products are not suitable for every investor and you should ensure that you understand the risks involved and should seek independent advice from professionals or experts if necessary.

Ready to Invest?

Explore a new trading experience with
Century Trader App

OPEN LIVE ACCOUNT TRY FREE DEMO

Losses can exceed your deposits

Ready to Invest?

Explore a new trading experience with
Century Trader App

OPEN LIVE ACCOUNT TRY FREE DEMO

Losses can exceed your deposits