If you bought at 100, you would put a (fixed) stop loss at 90. If the market rose to, say, 120 then fell back to 90 you would get stopped out at 90 and lose 10 points.
If you bought at 100 and put a 10 point trailing stop loss in it would start at 90 but then each point the market went up the stop loss would move up with it - but if the market moves down the stop loss doesn't. So if the market went to 105 your stop would go to 95. If the market fell to 97 your stop would stay at 95. If the market then went to 120 your stop would rise to 110. If the market then fell to 110 or below you would get stopped out.
Obviously, reverse for going short.
The advantages are that you minimise losses and lock in profits. The disadvantages are that it is easy for a reversal to come back and knock out of the market before carrying on upwards.
You place your trade and enter a stop there and then.
Once the trade is open, all you need to do is click on the trade in the 'open trades' area and it allows you to enter a new stop level.
So as the price goes in your favour you can amend the stop if you like, to lock in some profits
I'm not sure if any SBs offer auto trailing stops (one's where their computer trails the stop for you), but you can do it manually with most (just by cancelling your old stop and putting in a new one). IB does auto trailing stops.
What Wideboy means by 'locking in profit' is that, in my first example above, the market went to 120 but you still lost 10 points (when it fell back to 90). But by having a trailing stop (in the second example) you have 'locked in' 10 points of profit so when the the market falls from 120 to 90 you actually still make 10 points of profit (cause you were stopped out at 110).
If the price goes in your favour after you enter a trade, and you move your stop loss to your actual entry level, then you can let the trade run and the worst that can happen is you will be stopped out for 0.
thx mmillar and wideboy u have been very helpful...........it seems IGINDEX is the probably the most user-friendly of the SB companies from what i have read so far on this site but i don't understand why there seems to be a lot of ppl trading with D4F.........i mean spreadbetting
I am fairly new to trading, and have been trying to educate myself through research and seminars (One recently with Sr. Member NAZ - the Daytrading TA course - which was EXCELLENT, by the way)
Despite having done some paper trades, combined with some real trades, I am still not clear on how best to set my initial stops and then trailing stops.
There seems to be several approaches when setting the initial stop (before trailing):
1) Use 7-8% below price movement
2) Use a set amount of cash, determined by the size of your account. ex., Never lose more than £200 (on an account worth 10k)
3) Stick to a percentage (ex., 2% of your account)
Is one method more popular than any other?
If your stock moves up, would it be advisable to use that same % in most cases as your trailing stop, or should the stop be 'loosened' up after locking some profits?
The problem seems to be - especially on Nasdaq stocks, I will get myself stopped out too often with such tight stops.
I assume it has a lot to do with the size of one's trading account. Until I become more experienced, I will most likely swing trade (Nasdaq/NYSE) with an account of £10-15k, so my gut instinct is to set a stop goal so I never risk more than 2% on the initial trade.
Can anyone advise what approach might be best for me for both the initial stop and then the trailing stop?