For active futures traders and investors, the trailing stop loss is a valuable tool for optimizing profitability. Featuring dynamic functionality, these types of orders complement a wide variety of trading strategies. Let’s take a deep dive into trailing stops and explore how they can help you maximize your potential in the marketplace.
Trailing Stops: Functionality
A trailing stop loss is an order that moves in concert with an open position in the live market. It may be structured according to a variety of parameters, including the most common:
- Account value
- Percentage loss
- A set number of ticks
The functionality of a trailing stop is dynamic in nature. As an open position gains value, the stop-loss order moves in tandem with the positive price action.
For example, assume you believe that CME Euro FX (6E) futures are likely to post a strong intraday rally following a weaker than expected U.S. Non-Farm Payrolls (NFP) report. In an attempt to capture a bullish move in the 6E, you decide to buy one contract at market price on the NFP release at 8:30 a.m. EST. However, you only wish to risk 3 percent of your $10,000 account balance on a 1:3 risk-to-reward day trade.
The following trailing stop-loss strategy incorporates your goals into a succinct, easily executed trade:
- At 8:30 a.m. EST, you send a buy market order for one lot of 6E to the exchange. The order is instantly filled at the best available price, which happens to be 1.20000.
- When the position is opened at 1.20000, your stop-loss parameters are activated. In this case, your maximum risk on the trade is $300 ($10,000 x 3%) or 48 ticks ($300 ÷ $6.25 per tick).
- The trade is now live, with an initial sell stop market order being placed at 1.19760. Your profit target of $900 ($10,000 x 9%), or 144 ticks ($900 ÷ $6.25 per tick), is a “sell limit” order located at 1.20720.
- As price moves up, the trailing stop loss follows on a tick-by-tick basis. This incrementally reduces the trade’s risk exposure while preserving the profit objective. If neither the profit target nor stop is hit, the position is managed as a day trade and liquidated just ahead of the closing bell.
Trailing Stops: Benefits
Trailing stop-loss orders provide users many benefits in the live market. Here are three of the largest:
Although trailing stops may be executed manually, many are fully automated on software trading platforms. Automation takes the guesswork out of executing complex strategies and mitigates the negative impact of emotional trading.
Profit Target Flexibility
The beauty of trailing stops is that you can exit the market on your terms. No matter your desired time horizon or risk versus reward ratio, you can design a trailing stop strategy to help you satisfy nearly any objective. This flexibility is especially useful in fast-moving, volatile futures markets.
Opportunity to Catch a Runner
“Catching a runner” is a strategy in which the trader aims for extraordinary profits while assuming a limited risk. This is a common practice in volatile markets, such as those already trending or in the process of breaking out. Although the percentages of success are minimal, trailing stops ensure that risk capital is protected while extraordinary profits from market runs are pursued.
In short, trailing stops give you a way of incrementally reducing risk while preserving a chance at extraordinary rewards. This type of functionality is ideal for making the most out of breakout, reversal, and trend-following strategies.
Execute Trailing Stop-Loss Strategies in Real Time
One of the best ways to gain an understanding of how trailing stops work is to watch them in action. With your complimentary 14-day trial of dt Pro, you can observe, build, and execute trailing stop-loss strategies in real time. Featuring advanced order types and access to the world’s hottest markets, a dt Pro demo account is an ideal way of witnessing the power of trailing stops absolutely risk-free.