In this lesson of the CFD complete guide, we will deal with a Trailing Stop. This is a different function from the one seen in the two previous lessons, namely Stop Loss and Stop Limit. The Trailing Stop is in fact a stop that varies depending on the market trend.
Before proceeding, please note that Trailing Stop are available on the Plus500 platform, as are the other stops previously detailed, and can also be accessed in demo mode to practice with virtual funds.
What is a Trailing Stop for?
To better understand how a Trailing Stop works, you’ll need to understand what it is meant for.
Suppose we open a trading position and set a stop loss that automatically closes the position at a certain value.
In the event that the market moves in our favour, would not it be great if the Stop Loss level moved in the direction of the same, updating the bar of the quota set for the loss ceiling?
And that’s what a Trailing Stop was designed for.
Here is an example to better understand a Trailing Stop
The Trailing Stop is more easily understood by an example.
Suppose that the price of an asset is 100 and that we want to open a “Buy” position. We set the Stop Loss at 90, so that if the price drops to 90, the position will automatically close.
But if the price went up, how could we better exploit our position? Easy: by using a Trailing Stop.
With a Trailing Stop, the Stop Loss will be raised automatically if the purchase position earns profits. Returning to the example, you could set the trailing stop so that if the price came to 110, the Stop would go from 90 to 100.
In the event that the price reaches 150, the Stop would come to 140. This means that the Stop will be adjusted but that it could close the position even during profits and not just at at losses.
This also applies to short positions, or “sell”, in which one operates on the downward forecast of the asset.
How to apply a Trailing Stop
First of all, it must be said that not all platforms offer the option of applying a Trailing Stop. This is a function present on the best trading platforms, one of which is the Plus500 platform.
After selecting an asset and clicking on the type of position to open, a window appears in which to set the order details. In addition to Stop Loss and Stop Limit, there are advanced features, including the Trailing Stop.
For our example, click “Buy” on the Ferrari asset (with CFDs that replicate the performance of Ferrari shares)
We have set 20 shares, for a required margin of €478.55. Clicking on “Advanced” will bring up the Trailing Stop option, expressed in Pips. 133 Pips, in this case, amounting to a €30.17 loss. For ease, let the Pip be based on the share already expressed in euro.
This means that the stop, set at 133, will close the position when the loss reaches €30.17.
Should the market move upwards, the Trailing Stop would also adjust, rising and maintaining the same level difference between the current rate and the maximum loss level.
So, ultimately, the Trailing Stop is a stop that varies according to the current rate and adapts to it, in the event that the market moves in a favourable direction.
Go to next lesson – Lesson 4d – How to buy or sell automatically at a certain rate