Trailing stop

From Traderpedia

A stop loss order on an open position which is moved as the price moves in the trader's favour, to lock in profit.

There are many ways of deciding where to place a trailing stop, such as:

  • A certain percentage above/below current price.
  • At, or just above/below the top/bottom of a certain previous price bar.
  • Just above/below a recent congestion level.
  • According to a parabolic curve drawn above/below current price. (See Parabolic SAR).

Generally the idea is to allow profits to run until the market reverses trend and takes the trader out of the position. The danger is setting the trailing stop too close or too far away from current market action, resulting in being taken out prematurely or giving up a susbstantial proportion of open profit, respectively.