How to Use Trailing Stop Loss Orders

How do you trail your stops and protect your profits? On this page, I'll show you a day by day example of how to use trailing stop loss orders. Your stop loss order needs to be placed after the market has closed.

Memorize the following sentence...

"My trailing stop loss order needs to go under the current days low or the previous days low - whichever is lower."

The following is an example of how to trail your stops on a day-by-day basis...

Trailing stop loss order: day 1

trailing stop loss order day one

The green highlighted candle is the current day and the day that you bought this stock. After the market closes, you tell yourself that, "My trailing stop loss order needs to go under the current days low or the previous days low, whichever is lower.

Since the previous day is lower then your stop loss order needs to under that day. This is the red line on the chart above (just under $44.50). Now, let's go on to day two...

Trailing stop loss order: day 2

trailing stop loss order day two

The green highlighted candle is now the current day. After the market closes, you tell yourself that, "My trailing stop loss order needs to go under the current days low or the previous days low, whichever is lower."

Since the previous day is lower then your stop loss order needs to go under that day (the day of entry). Now look back up at the chart above. You will see that your stop loss order has moved up. You always move your stop loss order up with a long position - never down.

Now, let's go on to the third day...

Trailing stop loss order: day 3

trailing stop loss order day three

Once again, the green highlighted candle is now the current day and the market has closed. You stop loss order will go under the previous days low (red line) because it is lower. Note that at this point your stop loss order is going to be close to your entry price. Just move your stop loss order to break even. Now, you have a "free trade" and you can relax!

Trailing stop loss order: day 4

trailing stop loss order day four

Now, your stop loss order has moved up significantly and you have a decent profit in this stock. If you get stopped out now, it will be a good trade!

Trailing stop loss order: day 5

trailing stop loss order day five

So far this has been a great trade. But, now this stock is approaching the previous swing point high (that black candle) which will likely be a resistance area. Avoid the temptation to sell because you think that the stock will begin to fall. Just continue trailing your stops...

Trailing stop loss order: day 6

trailing stop loss order day six

Once again, your trailing stop loss order will go under the previous days low because it is lower.

Trailing stop loss order: day 7

trailing stop loss order day six

On this day, your stop loss order is triggered and you get stopped out of this swing trade with a nice profit. Nice trade!

Remember the sentence, "My trailing stop loss order needs to go under the current days low or the previous days low - whichever is lower."? Well in this example trade we never put our stop loss order under the current days low because the previous days low was always lower.

Here is an example (on the same chart) of when you would put your stop loss order under the current days low.

trailing stop loss order current day

Imagine that the green highlighted candle is the current day and the market has closed. Since the current days low is lower than previous day, then you need to put your stop loss order under today's low. This will make for a very tight stop loss order and the majority of the time you will get stopped out. But, as you can see from this example, sometimes you won't get stopped out and the stock will continue to move in your favor.

Trailing your stops in this manner is a great way to remove the emotion from a trade. There is no guesswork involved. You just move your stop loss order up in the manner described above and you can eliminate the "emotional selling" that seems to plague so many traders.

Some things to consider

  • Consider abandoning this trailing stop strategy if the stock that you are in suddenly moves significantly in your favor. You do not want to give up huge gains by trailing your stop loss order under a wide range candle!
  • When a stock moves up to test the next resistance point, consider selling half your shares and trailing your stop loss order on the remaining shares.
  • You do not want to get stopped out prematurely if the stock that you are in is at the beginning of a trend. Keep your stop loss order further away so that you can ride the trend to completion.
  • Finally, see this page for why you may not want to use stop loss orders (especially on Nasdaq stocks).

There are no hard and fast rules for every single trade because every trade will be different. Just remember the #1 rule of trading: Keep your losses small and let your winners run.

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