Trailing stops are dynamic exit orders which combine risk management with trade automation. This advanced order type automatically follows your position as the market advances in your favor, helping to minimize losses.
A main difference between a standard stop loss order and a trailing stop is that the trailing stop has the potential to move, or trail, as price moves in your favor.
The award-winning NinjaTrader platform provides traders the ability to place trailing stop orders using ATM strategies. Using this tool, you can create custom trailing stop orders ranging from basic to complex.
- Learn how to set a trailing stop with NinjaTrader.
How Does a Trailing Stop Work?
Trailing stops are placed a set distance away from your entry price and only begin trailing if the price moves in your favor. Additionally, trailing stops can only move in the favorable direction of your trade, not against it.
For example, a trailing stop for a long position would start as a static sell order below the entry price. If the price moves upward to a certain point, the profit trigger, the trailing stop moves up at a predefined frequency. If the price moves down, however, the trailing stop remains in place.
Pros of Trailing Stops
- Exit orders adjust in an automated fashion offering flexibility to traders who use them.
- Trailing stops can help reduce emotional turmoil and allow traders to focus on the market instead of individual exit orders.
- Gains can be captured if price moved favorably but then reverses.
- A trailing stop can prevent a winning trade from becoming a losing trade.
- A profit target order is not always needed since your stop is always trailing behind the price.
- Trailing stops allow your winning trades to run in trending markets.
Cons of Trailing Stops
- Choppy markets may cause trailing stops to be ineffective and can result in losing trades.
- If a trailing stop is set too close to the market price, a slight pullback could stop you out early when in fact the overall price move is favorable.
- If a trailing stop begins trailing too early with a small profit trigger, it might not give the trade enough “breathing room” to develop.
The NinjaTrader platform supports both advanced and basic order types and is always free to use for advanced charting, strategy backtesting and trade simulation. Get started tracking your favorite markets with an industry-leading trading platform!