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Advanced Stock Trading Strategies – The Trailing Stop

What Is a Trailing Stop

A trailing stop modifies a standard stop order by allowing it to be set at a predetermined percentage or dollar value away from the current market price of a security. When taking a long position,an investor sets a trailing stop loss below the present market price, while for a short position, it’s set above. Its purpose is to safeguard profits by permitting a trade to stay active and continue to generate as long as the price moves favorably for the investor. This order automatically closes the trade if price shifts in the opposite direction by a specified percentage or dollar amount. Typically, a trailing stop is established simultaneously with the initial trade placement, but it can be set afterward.

Or for a more easy way: Trailing stop adjusts stop orders, securing profits while allowing trades to continue if prices move favorably, closing when prices reverse.

Getting a Grip on Trailing Stops

Trailing stops only go one way because they're meant to lock in gains or cap losses. Imagine you set a 10% trailing stop loss on a stock you bought. If the price drops 10% from its highest point after you bought it, bam! It triggers a sell order. But here's the kicker: the trailing stop only moves up when the stock hits a new high. And once it moves up, it stays put. No going back down.

The Art of Setting Stop Loss and Take Profit Levels

Most traders would probably agree with the proposition that the hardest thing to do right in trading is setting stop loss and take profit levels Much of the education and trading materials shared with educated traders focus on finding the right places to enter trades But let us be clear that entry is very important, but good trade management, i.e. using the correct stop loss points taking profit levels , changing these levels appropriately as the trade progresses, is equally important

Stop losses may be dynamic as a way to take profits on a trade that is progressing profitably, however stop losses should only be moved in the direction of reducing losses or taking profits. This way, the trade you do well will end up making more money. This is also a good way to make a trade die a natural death rather than targeting profit targets that can be very difficult to predict

An example of a dynamic stop loss is a trailing stop loss. This may be set at a certain number of pips or based on some measure of average volatility Another example is moving the stop loss level periodically, so that it exceeds key highs or lows or other technical indicators. The beauty of this is that the trade stays alive. As long as it goes well.

When a long trade begins to break through, key support levels of this type of stop are reached and the trade is terminated. This method is one of letting the winners run while excluding the losers. In trading, one can make a profit by short selling.

A short position is a trend trade where an investor sells borrowed shares in the open market. The investor expects the stock price to decline over time. At that point he will buy the shares on the open market and return the shares to the broker who borrowed them from them,while entering a short position is usually done using stocks, the same trading logic applies to other types of assets. Such as stocks, exchange-traded funds, commodities, and currencies.

Short selling places the investor in positions of unlimited risk and limited reward. For example: if an investor enters a short position on a stock trading at $20, the most he can earn is $20 less the fee. While the most he can lose is infinite. Because the stock could technically increase in price forever. Short selling is the safest strategy to use if you believe that the price of the underlying asset will fall in the future and you want to profit from this loss.

Double tops and Bottoms patterns

Let's discuss double tops and bottoms patterns, in this image we can see a pattern of a double top pattern.

Double tops or ' ''M'' formation, bottoms or ''W'' formation, are reversal patterns.

The double top indicates that the price is no longer rising. There is likely to be a decline in prices and the double bottom indicates that the price is no longer falling and the price is heading higher.

A double top is formed when the price reaches a top within an uptrend. Then it declines at the next high. The price peaks near the previous high and then falls below the swing low. It is called a double top because the price peaked in the same area twice.

Unable to move above this resistance area pattern, complete traders may take sell trades or exit buy trades when the price drops below the swing low.

For example: if the price reached a high of $50 and fell to $47,It rose to $50.05 and then fell again below $47. The pattern has been completed and this may indicate that the price will continue to decline.

A double bottom is formed when the price reaches a bottom within a bearish pattern.

Then it declines back to the upside. In the next decline, the price stops near the previous low and then rises above the high of the decline. It is called a double bottom, because the price stopped in the same area twice.

It is not possible to fall below this support area, the pattern is completed and traders may take buy trades when the price rises again as it is the top of the decline, for example if the price falls to $47, go to $50, and falls to $46.75, then rising again above 50 indicates that the price will continue to rise.Not all traders are interested in taking trades when a chart pattern breaks. However, the double top or bottom pattern still alerts traders when they want to reconsider their long or short positions.

Doji candle Another reversal pattern is the doji candle , which is formed when the open and close of a security are approximately equal in the specified time period.

A short squeeze is a situation in which a stock or commodity being shorted moves sharply higher. This forces more short sellers to close their short positions. It increases upward pressure on the stock. This means that short sellers are exited from their short positions, usually at a loss. They are generally occupied by positive development. It indicates that the stock may be on its way to a turnaround. Although the turnaround in stock fortunes may be temporary, few short sellers can afford to risk rapid losses on their short positions. They may prefer to close it even if it means incurring a huge loss. Short squeeze is a major risk associated with short selling. If a stock starts rising quickly, it may continue to trend higher because short sellers will likely want to exit. For example, if a stock rises by 15% in one day, short positions may have to liquidate and cover their positions by buying shares. If enough short sellers buy back the stock, the price will be pushed up.

Conclusion

In conclusion, mastering advanced stock trading strategies such as trailing stops requires a nuanced understanding of market dynamics and chart patterns like double tops and bottoms. By implementing these techniques, traders can effectively manage risk and optimize profits in volatile market conditions. Whether it's using trailing stops to lock in gains or identifying reversal patterns like double tops and bottoms, a comprehensive approach to trading can lead to success in the ever-changing world of financial markets. So, stay informed, stay adaptable, and may your trades be profitable.