What is Trailing Stop-Loss and Strategies to use it

In Technical Analysis, many times we mention to use Trailing stop-loss. Let us understand what is Trailing Stop-Loss?

Trailing stop loss is a  Stop-loss strategy to protect profit. In simple words it means, that your stop-loss moves up as the stock prices moves on higher side.

You can apply a trailing stop-loss in Bull/Bear market but it might not work in sideways market due to volatility.

Let us look at how we can use the trailing stop-loss in price terms with an example of #ITC

If you entered a long trade on ITC at 193, with a stop at 190 I.e. difference of 3 Points, as the price moves to 199 your stop will move to 196.

If the price then moves back to to 196, you will exit the position at 196 making a profit of  3 Points per share. 

Is there another strategy for trailing Stop? 

Answer is Yes! We will look at these strategies ahead -   

• Strategy 1 - Moving average Trailing Stop
• Strategy 2 - Swing Low Trailing Stop
• Strategy 3 - Percentage Trailing Stop

Strategy 1 - Many trades use this strategy  to book profit on timely basis and ride the maximum upside. Many Traders use MA 10,20,30 line  for Trailing Stop on closing basis.  you can trail your stop with MA so that one can come out of the equity stock at the top before the reversal heats up.

Lets see with an charting example of #RelianceInd for better understanding - 

Strategy 2 - as you know an uptrend consists of higher highs and lows so one cause the swing lows to trail the stop loss.  In this case you are good till the time trend is on the higher side.

Here’s how to do it:

1. Identify the previous swing low
2. Set your trailing stop loss below the swing low
3. If the price closes below it, exit the trade

An example - # RelianceInd Chart

Strategy 3 - this strategy is pretty simple, first one need to decide the stop loss percentage you will exit the trade once it reverses from top.

One can choose any percentage as deemed fit, Traders use different %age to cut short their trade. It could be 10%, 20%, or what ever percentage you decide. 

For example 

If you bought Reliance at 1600 and have a trailing stop loss of 10% from top

This means if Reliance drops 10% from its high of 2200 you will exit the trade. 

Please share your view or any questions in comment sections for further discussions.