A Trailing Stop is one type of stop order that you are able to set such that the stop loss level moves automatically when the market moves in the direction of your trade, helping you to lock-in gains in the process while your spread betting position is open. This makes away with the need of constantly having to monitor and move your stops. Trailing stop order can be used on both long and short positions but they aren’t offered by all spread betting providers. A trailing stop is especially useful if a spread better believes that a market or stock price is trending upwards, but is afraid of linking in an order to the position as he is afraid that it might get triggered by the day-to-day market volatility.
Trailing stop loss orders automatically move up behind the market, but stay static if the price dips back towards it. This has the effect of locking in profits while keeping the position open for as long as possible. There is no fee for utilising a trailing stop order, but stop-loss orders are not guaranteed and you may be subject to slippage in volatile market conditions. Note also that trailing stops may not be available on all markets.
When you open your spread bet you indicate two numbers:
- Stop distance – how far away from the opening level your Stop is placed
- Stop size – the size of the increments by which the Stop can move
Let’s suppose you buy the Daily FTSE 100 at 5800 – 5802, selecting a Stop distance of 30 points and a Step size of 10 points.
The Stop initially rests 30 points behind your opening trade price level, at 5772. Immediately the FTSE starts to rise. Very soon our closing price has risen to 5812 (10 points above your opening price) and your Stop ‘steps’ up by 10 points to 5782 to re-establish a 30-point distance from the new market level.
The market continues to go higher and by lunchtime the FTSE 100 index is hovering around 5865 – 5867. Your stop level has been moved automatically 5 more time, so now your trade is showing a good profit with the stop waiting 33 points behind at 5832.
An unexpected jump in USA unemployment figures puts heavy downward pressure on stocks and within a short time the index is trading back at 5810 – 5812. Your Trailing Stop comes into operation and your trade is closed 33 pts below the recent high – at 5832, which is still quite above your initial trade price of 5802.
With a normal stop loss order you would remain in the market, but the unrealised profit would be much smaller. On the other hand with a trailing stop you were able to gain from a volatile market. Trailing stops are particularly useful to protect your profit while trading a trend.
One reader commented “Gave back 160 points! A more clear exit strategy is needed to ensure I don’t give back the gains but at the same time let the trade run, any ideas? My initial stop is so tight if I trail it, it will almost certainly get hit out pretty quickly.”
The distance on your trailing stop doesn’t have to be the same as the distance on your initial stop. If you open the bet with a tight initial stop (say 6pts) WITHOUT setting a trailing stop at that stage, then once the bet is running, immediately go to ‘EDIT’ button, you can set a trailing stop at, say 20pt distance, and say 5pt step. This will not shift your initial 6pt stop. The 5pt steps will bring your 20pt distance closer and closer to your initial stop, but won’t shift it until the trailer overtakes it. Thenceforth your trailer will follow at the preferred greater distance.
In any case I do think there are pros and cons either way on stops and no one way is perfect. In particular, please note that trailing stops are only possible for non-guaranteed stops and may thus be susceptible to slippage.
“I pre-define the risk of every trade and pre-define the stop loss point before I enter the trade. If price hits the stop loss point I am out, no questions asked. With some strategies I trail a stop: if price hits that trailed stop I am out, no questions asked. There are two key skills here: firstly, setting stops at appropriate levels for the strategy being traded; and secondly, exiting when the stop gets hit. I believe both skills are essential for trading success. – Malcolm Pryor, Author of The Financial Spread Betting Handbook”