Trailing Stop Loss
This is the definitive guide on Trailing Stop Loss.
Stop Loss as the name suggests helps you to stop the loss. It puts a limit to the loss that one can incur in a trade.
Stop Loss is the most crucial aspect of trading. The number one reason why people have to face big losses is that they do not keep stop losses. Imagine about it. If you exit from your positions when your losses are minor then how can there be big losses?
However, you know whats better ? Thats a trailing stop loss.
What does trailing stop loss mean?
Trailing stop loss is similar to the regular stop loss however it has a trailing amount attached to it.
A trailing stop loss order is very effective at managing risk and optimizing profits.
The trailing stop is not generally used as an entry order but rather when you already have an open favorable position which is accumulating profit.
There are three main benefits of using a trailing stop loss.
- Secure Profits
- Doesn’t Limit Profits
- Sets limit of Losses
It allows you to secure profits too while securing profit it doesn’t place a limit on potential profits while securing profit you are at the same time setting a limit on potential loss in this way you can ride a trend while having an effective exit strategy in place.
How does trailing stop loss work?
Initially, the trailing stop loss is just the same as the regular stop loss. The difference is realized when the trade moves in your desired direction.
If you have an open long position the trailing stop is set at a predefined distance from the stocks current market price in the case of a long position the stock price is placed at a fixed distance below the market price. As soon as the price moves up, the stop loss moves up by the desired amount, nothing happens when the stock moves down.
In this way, your trade, as well as the risk, is managed by a trailing stop loss. So the profit is protected (remember its protected not limited) and the loss is also limited.
You must note that the minimum trailing stop loss you can set for trading in Indian Stock Market is 20 ticks that is Rs 1.
If your trailing stop loss is Rs 1 then a move of Rs 1 in the stock will lead to a change of Rs 1 in your stop loss.
If you have set trailing stop loss as Rs 5, then a move of Rs 5 in the stock will lead to a change of Rs 5 in your stop loss. So if the stock moves in your desired direction by Rs 4 and then reverses, there will be no change in the value of your stop loss.
This is how the trailing stop loss works.
The concept of trailing stop loss can be better understood by an example
Trailing stop loss example
Let’s say that you have bought stock in company ABC at Rs 100, now the trade goes in your direction and the price is currently at Rs 105.
Your initial stop loss was set as Rs 97, but since you are using trailing the stop loss, as the price moves by 5 points, your stop loss moves up by 5 points and is now Rs 102.
Now if the price keeps moving up, your stop loss with also keep moving up and you will be able to make maximum profit by riding the trend.
If the price moves down then it will hit your stop loss, however, you will exit at a profit since your stop loss is already above your buy price.
Your stop loss should be big enough so that small price fluctuations do not result in premature trade execution but small enough so that it doesn’t consume all your potential profit.
This is how trailing stop loss allows you to keep accumulating profit until the market turns against you.
Let’s look at the second case scenario how to set a trailing stop with an open short position. When you have a short position you set your trailing stop at a fixed amount above the market price.
Let us say you have sold XYZ stock at Rs 100 and your initial stop loss at Rs 103.
As the market price decreases the trailing stop loss also decreases. If you price reduced by 4 points and reaches Rs 96 your stop loss will now be Rs 99 instead of Rs 103.
Now if the price starts rising you don’t have to worry since your profit will remain protected and you will be able to exit with it.
This is all about the trailing stop loss examples for both long and short positions.
Now let us see, how you can apply trailing stop loss in actual trading as per the broker’s platform which you use.
Trailing Stop Loss Zerodha
In Zerodha you need to place a bracket order to use the feature of trailing stop loss. In a bracket order, there are three additional fields apart from quantity and price, they are Stop Loss, Trailing Stop Loss, and Target.
You don’t need to put the actual price that you want for the stop loss and target. You just need to enter the number of points you want to have as the target and stop loss.
Just as you can see in the trailing stop loss example in Zerodha below.
The trade will be placed with a buy price of Rs 11000, a target of Rs 11100 and stop loss of Rs 10950.
If no trailing stop loss is used and Nifty goes upto 11080 and then falls down back to Rs 10950 hitting the stop loss then you would have to exit at a loss.
But since trailing stop loss of Rs 10 is being used, for every Rs 10 up move in Nifty, the stop loss will increase by 10 points. If Nifty hits 11080, the stop loss will shift to 11030, so if Nifty starts falling, limit order will be executed at 11030 & you will be able to exit at a profit of 30 points.
To place a bracket order with trailing stop loss on Zerodha Pi, right click on the stock name to choose Bracket Order Entry and then fill the fields in the same way as discussed above.
You can place trailing stop loss on bracket orders in Sharekhan Trade Tiger. Here you have an additional option wherein you can choose whether you want to trail your stop loss from the market price or when the price reaches a specific value.
So if you buy company XYZ stock at Rs 100, with an initial stop loss at Rs 98, and you have the chosen Rs 102 as the price at which trailing starts, when the price moves from 102 to 103, your stop loss will trail from 98 to 99 & so on.
Trailing Stop Loss ICICIDirect
How to put trailing stop loss in icicidirect?
ICICIDirect has the facility of using a trailing stop loss. It is available under the section of price improvement order, you would be able to place cash orders with trailing stop loss condition, where the limit price and stop loss trigger price would automatically update as per the market price movement and Stop Loss update condition defined.
Trailing Stop Loss HDFC Securities
HDFC Securities does not have the facility of using a trailing stop loss.
You can use a stop loss trigger price wherein your stop order is activated only when the market price of the stock crosses the trigger price.
Lets say you short sell stock ABC at Rs 400 with stop loss set at Rs 410, and stop loss trigger price as Rs 405.
The stop loss sell order will only get activated once the price breaches your trigger price set at Rs 405.
Trailing Stop Loss Kotak Securities
Trailing stop loss order can be placed on Kotak Securities. It has the same options just as discussed for ShareKhan above.
Check out the screenshot below for reference.
Trailing Stop Loss SBI CAPSEC
Trailing stop loss facility is not available on SBI CAPSEC.
You can use regular stop loss as shown in the screenshot below.
Trailing Stop Loss MT4
It is easy to put a trailing stop loss on MT4. Just make sure that you have set an initial stop loss, then right click on the order you want to add the Trailing Stop. Choose Trailing Stop and Select “Custom” to enter the desired points you want to set as the trailing stop.
Conclusion – Trailing Stop Loss
Now that you have understood about trailing stop loss vs stop loss, you must have realised that using a trailing stop loss is much better. However it important to know that there are few risks involved with using trailing stop loss because you may frequently get stopped out due to market volatility and whipsaws.
However using trailing stop loss along with a regular stop loss, you can reduce losses and protect profits.
Ultimately you can’t make a loss by booking profits
One critical thing to keep in mind is that don’t keep the trailing stop loss too close to the entry, as you will always exit too early and that’s not the purpose of using a trailing stop loss. The main aim of using a trailing stop loss is to protect profit as the price moves in your favored direction and to get you out if the price reverses.
That’s all for this article.
If you have any other questions regarding stop loss or if you would like to share your own methods of using stop loss, feel free to comment below.
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