Securing Profits with Trailing Stops

What is a Trailing Stop?

A trailing stop is a dynamic stop-loss order that moves sequentially with the price of an asset, but only in the favorable direction. Once the price reverses by a specified percentage from its highest peak since you bought it, the stop is triggered. This allows you to ride massive trends while automatically locking in profits if the trend breaks.

The Mathematical Formula

To manually calculate where your trailing stop currently sits, you take the highest peak price the asset has reached since you entered the trade, and subtract your trailing percentage.

Practical Trading Scenario

You enter a stock at $50.00 and set a 10% trailing stop. Initially, your hard stop is calculated at $45.00 ($50 - 10%).

The stock goes on a massive run to $100.00. You plug $100.00 into the calculator along with your 10% distance, and it tells you your new hard stop level is $90.00. Even though your initial risk was at $45.00, your stop loss has "trailed" the price up, effectively locking in $40.00 per share in profit. If the stock drops to $90.00, you are sold out. If it continues to $150.00 without hitting $90, your trailing stop will keep moving up mathematically, squeezing maximum profit out of the move.