There are many methods used in trading. Each one has their own advantages and disadvantages. The most successful ones are those that focus also on the basics along with the complexities that may be inherent in every trading situation.

One of the basics that should be important in successful trading is knowing the right time not only to buy, but also to sell. Unfortunately, this is where most novice traders make the most gravest mistakes, especially on knowing the right time to sell or exit a certain trading position.

Trailing Stop

There are various techniques also used in exiting a certain position. One of them is applying a trailing stop. A trailing stop is known as a stop-loss order that is set at a certain percentage level just below the market price. The trailing stop price adjusts just as the price of a certain position fluctuates.

Trailing Stop Example

Suppose a trader buys a stock at a price of $5.00 per share. He then places a sell order of the stock with a $1.00 trailing stop. This means that the stock should be sold once the stock price reaches $4.00. But if the stock approaches even one cent shy of the $1.00, the trailing stop order is never executed.

In another situation, the stock price rises to $10.00 instead of falling. In this case, the trailing stop order would now be executed once the stock price reaches $9.00. In effect, the trailing stop adjusts as the market price for the stock rises or fluctuates.

Advantages And Disadvantages

One of the main advantages of the trailing stop is that it allows traders to keep profits from eroding while trying to cut losses at the same time. With a trailing stop, traders can still try to earn profits while keeping the same limit to exit the position when the price is going down. One of the disadvantages of the trailing stop is that it can prevent the trader from realizing the maximum profit potential of a certain stock that may also be considered quite volatile, with prices that fluctuate in various degrees in a short period of time.