Implementing trailing stops is crucial in managing trades effectively. Once a protective stop is in place the trade will either trigger that stop or begin to generate returns. To maximize returns, without giving up too much gained, a trailing stop is commonly used to lock in gains as they occur. Here are some different options available.
Bringing the trade to break even
One approach is to set a break-even level, where a stop is placed at the entry price once a certain profit level is reached to secure the trade without being triggered by minor fluctuations.
Exiting half and then bringing it to break even
Another method involves exiting half the position when the profit reaches the break-even level and raising the break-even stop to the entry price, ensuring a profit while still keeping a portion of the position open. The decision between using a technical point or a money point stop depends on the investor’s preference. A technical stop is set at a price where it’s evident that the trade is reversing, while a money point stop defines the maximum fixed amount an investor is prepared to lose.
Volatility stops adjust to market conditions
Volatility stops are based on historical volatility and adjust according to market conditions. Additionally, a maximum winning favorable excursion can be used as a trailing stop, considering the highest profitable point reached before exiting. Trend line stops follow price action and are advantageous when there’s no significant clustering of orders.
Trend line stops
A trend line stop can be used because a trend line follows the price action. As a technical point stop, it has advantages in bunching of orders at a critical level (such as a support or resistance zone) usually not seen along a trend line, which when triggered, the execution of the exit will be less influenced by competing orders. Trend lines can also provide excellent reference points for knowing when a trade is turning against you if the trend line is broken.
See below for an example of a trend line stop on China’s 50 index.