5 Different Ways to Set Up a Trailing Stop

A trailing stop is a stop loss order or profit exit, that is continually adjusted either manually by the trader or automatically by the trading software that he is using.

It's purpose can be either to reduce risk on a trade or to enable price to have room to run, attempting to maximize profits, or it can accomplish both.

Remember, it's extremely important to let price run as far as possible when trading. I really dislike the old saying "you can never go broke taking a profit". It's very misleading.

If your method of trailing exits is too tight, you run the risk of getting stopped out of trades too early and in the long run, after many trades your win/loss ratio will be too small to have a winning system.

And, as I mentioned before, the expectancy of your system will be negative. You don't want that ........let the winners run.

SUPPORT AND RESISTANCE

There are many different methods you can use to trail a stop.

One of the methods that I have used extensively uses simple support and resistance. It takes advantage of retracements in a stock's price to provide natural placement of a stop order.

Screenshot of support and resistance trailing stops on a chart

Learn how to use support and resistance as a trailing stop.

TRENDLINES

Another type of trailing stop I've used quite a bit takes advantage of the simplicity of trendlines.

Trendlines make very effective day trading tools. A trendline's upward slope created by a stock creating higher highs, allows a day trader to trail a stop order directly under both the line and a previous price bar, allowing price to often run to new highs before the position is exited.

Screenshot of a trendline being used as a  trailing stop

Learn how to use trendlines as a trailing exit.

MOVING AVERAGES

Moving averages (MA's) can also be used to adjust stops and profit exits in the desired direction of the trade.

Different periods of MA's, various types of MA's (simple, exponential, weighted, etc), even moving averages that use price highs or lows instead of the close could be used.

Screenshot of moving average as a trailing stop

Learn how to use moving averages as a trailing stop.

VOLATILITY STOP

If you'd rather not use price chart patterns, trendlines, or profit objectives for exits, than another good option for you might be a volatility stop.

This indicator does well at moving quickly to adjust to current price action and of course the default settings can be adjusted if quicker movement is required.

Screenshot of volatility stop on chart

Learn how to use a volatility stop as a trailing stop.

PARABOLIC SAR

Remember the parabolic SAR you learned about in one of the day trading tutorials?

It too can be used as a trailing exit.

Screenshot of parabolic sar as a trailing exit

Learn how to use the parabolic SAR as a trailing exit.