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Published On: Tue, Nov 27th, 2012

What is a Trailing Stop?

The trailing stop is a handy risk management tool that allows you to limit the risk associated with a trade without reducing your profit potential.

An Example of a Trailing Stop

Bob thinks Gold is going to increase in value but wants to limit any potential loss.  He opens a £10 per point spread bet at 1700 with a trailing stop loss 20 points away.  The gold price does in fact improve to 1800 but then retraces back to 1720.  Because Bob set up the trailing stop loss he made an 80 point gain (£800) as the system automatically closed his position at 1780 (20 points less than the highest point the price reached).  If Bob hadn’t used the trailing stop option then his profit would have been £200.

How to Set Up a Trailing Stop

It is very simple to set up a trailing stop.  When opening your position just select the stop loss option, choose how many points away you want the stop to be and select the trailing option.

Summary

Trailing stops are an extremely important tool for many financial traders.  The stop moves with any profit made with a trade and comes into effect when a market turns against you by a predetermined number of points.  The feature is offered my many spread betting companies, CFD brokers and Forex platforms but not all such companies offer them. If it is a feature you need then make sure to check whether it is something available through the platform in question.

About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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