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Brokers With Trailing Stop Loss Orders

Written By

Jemma Grist

Written By

Jemma Grist

Jemma is a writer, editor and fact-checker focused on retail trading and investing. Jemma brings a unique perspective to the forex, stock, and cryptocurrency markets and works across several investment websites as a researcher and broker analyst.

» Jemma Grist Profile Page

Fact Checked By

Tobias Robinson

Fact Checked By

Tobias Robinson

Tobias is a partner at DayTrading.com, director of a UK limited company and active trader. He has over 25 years of experience in the financial industry and contributed via CySec to the regulatory response to digital options and CFD trading in Europe. Toby’s expertise and dedication to financial education make him a trusted voice in the industry, including a BBC investigation into digital options.

» Tobias Robinson Profile Page

Updated

Nov 27, 2024

Brokers with trailing stop loss orders enable traders to set a stop at a certain percentage or number of points below a security’s market price. As the name suggests, the stop loss then trails behind the asset when the price shifts in an advantageous direction. The free risk management tool is commonly used when trading volatile assets, such as commodities and exotic forex pairs.

This guide explains how to set up a trailing stop loss using examples. We also list and review the best brokers with trailing stop losses in 2024. Read on to find out whether the popular risk management tool is good or bad.

How Does A Trailing Stop Loss Work?

The definition and purpose of a trailing stop loss is to limit losses or lock in returns by pulling out of the market before the value of an asset moves too far in an unfavorable direction. The investor essentially defines a percentage by which the price of a security would need to fall to automatically close out the position. The stop loss will remain active until either the trader cancels the order or the position is liquidated.

• If a trader is going long, the trailing stop should be placed below the current price
• If a trader is going short, the trailing stop should be placed above the current quote

The trailing stop should not be confused with a standard stop loss which is similar but set at a fixed amount/price rather than a percentage/number of points that moves in tandem with the position. Some day traders manually move a standard stop loss to replicate the benefits of trailing stop loss alerts and notifications, but this is time-consuming and unnecessary.

The trailing stop is particularly useful when there is market growth in your favour but then pulls back, because your trailing stop will move with the positive price trend but it won’t head in the other direction.

Note, a trailing stop loss will close the trade at the next available price which means there is a chance of slippage. To avoid this, a trader can set a guaranteed stop loss.

Example

To help understand how brokers with trailing stop loss orders work, let’s look at an example…

A swing trader buys one ounce of gold at $1,750. But instead of using a classic stop loss to sell their holdings if the price falls below $1,487.50, the investor places a trailing stop loss order at 15% below the current price.

Now if the price of gold falls to $1,487.50, the broker would automatically exit the position. But if the value of gold climbs, the trailing stop-loss would follow suit, staying 15% below the market value.

This means if the price of gold climbs to $2,500, the trailing stop loss would increase to $2,125. If the value of gold did then subsequently fall to $2,125, the position would be closed and the trader would take home a profit of $375 ($2,125 – $1,750). Note, this doesn’t take into account any broker fees.

Setting Up Tips

Consider the tips below when setting up a trailing stop loss:

• Try not to set trailing stops at a threshold that will trigger unnecessarily. A sensible amount is beyond 1.5 times the lowest price drop in the asset’s current range.
• Trailing stops should reflect a market’s current volatility, so if there is little movement in the value of an asset then the trailing stop will likely be closer to the current price.
• When using trailing stops on stocks that are experiencing significant price swings, moving averages are helpful to overlay. This can help to prevent a trailing stop from triggering unnecessarily due to a low swing in price.
• Don’t be overly reliant on trailing stops. Keep an eye on momentum as it could be worth adjusting the trailing stop if the asset is reaching an all-time high, for example.
• Trailing stop losses can also be used in premarket and after hours trading sessions. Just check your futures broker, for example, supports extended hours.

Other Risk Management Tools Explained

Interactive brokers with trailing stop loss orders also tend to offer other useful risk management tools. One popular solution is a take profit order which sets the price to sell an asset to safeguard any profits which have been made on a trade. The trader can continue to benefit from the price moving in a favourable direction but if the market was to swing in a way that could jeopardise profits, then the trailing stop can be used for damage control.

Another popular form of risk management is hedging. This is essentially the practice of taking out opposing positions on similar assets to cover any losses on original trades. Used correctly, a hedge can be an effective way to minimize risk exposure.

One strategy that can also be used in collaboration with the tools and strategies above is the 1% rule. This is where you do not risk more than 1% of your total portfolio on any single trade. You could invest slightly more than that, however, the key is to be disciplined and not to risk a small amount of your overall capital or deposit. This will mean that several bad trades won’t erode all your trading funds.

Final Word On Brokers With Trailing Stop Loss

Brokers with trailing stop loss orders provide an effective risk prevention tool. Trailing stops are available on most popular trading platforms and algorithms, including MetaTrader 4 (MT4), MetaTrader 5 (MT5), and cTrader. Some brands also offer trailing stop options on their own in-house trading terminals. Trailing stops are available at several popular brokers, including Webull, eTrade, Charles Schwab, and Questrade.

To prevent trailing stops from being triggered unnecessarily, research assets using moving averages and previous trends. This will help you choose thresholds which protect you from crashes, rather than cashing out during a dip that could be recovered from.

Use our list of top brokers with trailing stop loss orders to start trading today.

FAQ

What Is The Meaning Of A Trailing Stop Loss?

A trailing stop loss is a percentage-based threshold that can be set by the trader. If the value of an asset drops below this amount then it will be liquidated before its value can drop further. Importantly, the trailing stop will move in tandem with the original position if the market moves in the trader’s favour.

Is A Trailing Stop Loss A Good Idea?

Used correctly, brokers with trailing stop loss orders can help reduce risk exposure. Just make sure you have your trailing stop set beyond a level that could be triggered by ordinary market trends. This will help to avoid preemptive losses that could be easily recovered.

What Can I Do About Trailing Stop Losses Not Working?

If your trailing stop loss did not work, the best thing to do is to head to a demo account to refine your approach. You can also consider other risk management strategies.

Are Trailing Stop Losses A Suitable Form Of Risk Management For Beginners?

As long as you learn how to use them effectively, trailing stop losses can be a useful tool for all levels of traders. If you are new to trading, practice using brokers with trailing stop loss orders in a demo account first. You can then upgrade to a real-money account when you feel confident.

Which Is Better Stop Loss Or Trailing Stop Loss?

This will ultimately come down to trader preference. A standard stop loss is arguably easier to understand, but trailing stops provide greater flexibility – they will move with the market when it shifts in your favour but limit losses if it turns the other way.

How Long Does A Trailing Stop Loss Last?

Traders can decide how long they want a trailing stop loss to run on their platform. With that said, a trailing stop loss will usually run until the investor cancels the order or the position is liquidated.