The Trailing Stop Order

A trailing stop order allows you to focus on your main trading objective - capturing profits, while minimizing futures trading losses.

A properly considered and well placed trailing stop order can allow you to lock in some profit on many commodity futures trades... and more consistently...rather than getting stopped out with a regular stop, and ending up with nothing to show for your efforts.

This type of stop order isn't the perfect tool, but it is probably better at achieving the above two objectives better than most other tools...and with a minimum amount of effort.

However, for the benefits they can deliver, a trailing stop loss may not be right for your individual trading style. A contradiction? Not really.

It all depends, as we've said before, on your personal trading style, philosophy, strategy, etc., what you want out of your trading and what you can live with when trading commodities.

On this page, you'll be acquainted with the trailing stop , what it is, and how/when to use them in your commodity futures trading.

You'll come away with a much better understanding of how to use them in your day-to-day futures trading.

Topics covered on this page include:

- Trailing Stop Definition
- How to use this type of Stop Order
- Trailing Stop Orders - "Breathing Room"
- Trailing Stop Limit Orders

What is a Trailing Stop Order?

In a rising market, your trailing stop loss or trailing stop "limit", follows behind the rising or falling market price. depending on whether you are in a long or short trading position.

An important aspect of this type of stop order is that regardless if you are long or short...if the market price moves against your position, the trailing stop does not move back a like amount.

Why? We'll that would defeat the trailing stops purpose, of locking in and preserving profit gained to date on your trade.

How To Use a Trailing Stop Order

Perhaps you have a lower tolerance to futures trading risk and potential trade losses. Using this type of stop order may suit you to a tee.

Here's a good example of how to use a trailing stop loss order:You want to go long with pork bellies, but you've seen the market move up and down lately.

You're concerned in a good run-up, you could give much of that back the way the market has been acting.

Solution?

Instead of just putting in a plan old stop order and instead of manually adjusting it higher each time the pork bellies futures price rises.....plug in and use a trailing stop order.

As the price of pork bellies rise, your trailing stop advances behind it, by whatever set "trailing" amount you've chosen.

Pork bellies continue to rise and your trailing stop automatically locks in profits as the market price moves.

And when bellies prices move against your position, hits your stop order or stop loss limit, you're out of the market, but with a profit.

COOL, eh?

You'll learn how to use a trailing stop order by practice and trial and error.

How Much Breathing Room Does My Stop Need?

You can change how close or far away you maintain your trailing amount as you desire at any time.

The advantage of the trailing stop loss is that it allows you to lock in trading profits automatically as the market price moves in your favor, whether up or down. You don't need to do anything. (Well OK, almostthat simple).

As with any trading strategy and tool, you need to evaluate the downside. And with the trailing stop order, that downside tends to be getting prematurely stopped out of trades...but, stopped out with smaller gains.

This is more often due to having your trailing stop order too close to the advancing or declining market price.

The chances of you getting prematurely stopped out, often with a smaller profit, depend on how much "breathing room" you build into your trailing stop loss orders.

Tight Stops or Wider Stops?
Maintain close trailing stops if you want to minimize price moves against your position, in the case your assessment of the price move direction was wrong, particularly at the market open.

If you were expecting a rise and it falls, a close stop will get you out of the market with a very nominal loss.

However, if the price moves back up after taking your stop out,you'll miss any trading profits that may result...unless you come back into the trade.

Using a wider stop in this example, may have exposed you to a greater loss potential, but you could have remained in the tradewhen the price turned around and did eventually move in the direction you'd initially forecast.

So, those are some of the considerations you'll need to makein determining how close or far away to trail your stop order.

Additional Factors When Considering Trailing Stop Placement
All futures markets are different, with different fundamental factors affecting them, different seasonality patterns, higher or lower market liquidity, etc.

You'll need to learn about, watch, practice and participate in a market for awhile, plus become aware of that markets' news/events, before you'll start to acquire a market "feel".

It's that knowledge and 'feel' that will help you better "guess-timate" the sort of 'breathing room' you need to build into your trailing stop order, to allow a certain market to go through it's normal ups and downs in an advancing or declining price move or trend.

That will also help you capture bigger price moves without getting prematurely stopped out with smaller gains, when using a trailing stop or a trailing stop order.

The Trailing Stop Limit Order
...another Trading Tool

It may not be used that often, and brokerages might not be too keen on accepting a trailing stop limit order, due to the added work to continually track and move the trailing stop limit orderthrough the course of an open trade...particularly if requested by smaller individual speculators.


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