What is a trailing stop and how do I use it?
A trailing stop is a stop that automatically adjusts to market movement. This means it will follow your position when the market moves in your favour, and will lock in your profits and close the position if the market moves against you.
You set a trailing stop via the deal ticket in the same way as you set a normal stop. When setting a trailing stop you need to set the stop distance, as with a normal stop, and the trailing step. The trailing step is the number of points the market needs to move in your favour before your trailing stop will move with it.
Adding a trailing stop on the deal ticket
- Click on the drop-down menu under ‘stop’
- Select ’trailing’
3. Enter your stop and trailing step where prompted
NB: The trailing stop option will not be available on the deal ticket if you are placing a working order.
A trailing stop in action
Say you buy a position on the DAX 40 at 10,450. You set your stop distance at 15 points away from the current market level, so 10,435, and your trailing step at a distance of five points.
The DAX 40 moves in your favour by five points to 10,455. This move of five points will have triggered your trailing step, adjusting your stop distance to 10,440 – maintaining a distance of 15 points from your new position. Your stop distance will continue to be adjusted every time the DAX 40 moves a further five points.
If the DAX 40 were to hit a high of 10,493 before retracing by 70 points, your trailing stop will have been fixed at 10,475 and your position closed out, earning you a profit.
With a normal stop your position would have closed at 10,435, earning you a loss.
Please bear in mind that trailing stops are not guaranteed, and so can be subject to slippage. This means that they may not be executed exactly at the level you’ve specified.
