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Trailing Stop
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All trades should have an
expectation of a profitable result when entered. But at times
the market moves against an investor unexpectedly producing a
loss when the position is sold or closed. A trailing stop is
one tool that is used to protect investors by minimizing loss or
locking in profits if the market suddenly moves against a
position taken. |
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top orders are orders that become market
orders when the market price of a security reaches or
exceeds a given set price. A trailing Stop
order is one that is adjusted by the investor
periodically to compensate for changes in price of the
security. A new stop order is issued and the
old one cancelled when creating a trailing stop. The premise behind a trailing stop
is to limit your losses. As long as losses are small, an
investor is able to live to fight another day so it is better to
stop out a losing trade than to risk a larger percentage of
capital when the market moves in a way you did not expect. The
other side of this premise is to let your profits run. A
trailing stop, that is incrementally changed to follow the
current trading price, allows profits to continue and should be
far enough away from the current price level to compensate for
intra-day volatility as price moves in a larger trend. |
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The Parabolic Stop and Reverse (SAR)
is designed to provide stop loss levels for both sides of the
market. With each day's trading the Parabolic SAR moves
incrementally with price. When the SAR intersects with price
due to a price reversal or loss of momentum the trade is
considered to be stopped out. At that point the other side of
the market is taken and the Parabolic SAR starts fresh
indicating a possible trailing stop value for the investor.
Using the Parabolic SAR can be very helpful as long as the
security is not prone to short term price trend reversals. If
price is erratic, reversing quickly in the short trend, the
Parabolic SAR will likely produce poor results. |
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