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A trailing stop is a type of stop-loss order that automatically adjusts to the stock's changing market value. It is used to limit potential losses on a stock that is held in a portfolio.
A trailing stop order is set at a certain percentage or dollar amount below the market price of the stock. As the stock's price rises, the stop-loss price also rises, but if the stock's price falls, the stop-loss price remains the same. This means that if the stock's price falls and reaches the stop-loss price, the trailing stop order will automatically trigger a sell order, which will limit the investor's potential loss.
For example, if an investor sets a trailing stop of 5% on a stock that they bought for $100, the stop-loss price will initially be $95 (5% below the market price). If the stock's price rises to $110, the stop-loss price will automatically adjust to $104.50 (5% below the market price). If the stock's price then falls to $102, the stop-loss price will remain at $104.50 and the stock will not be sold because the stock's price has not fallen to the stop-loss price.
The main advantage of a trailing stop order is that it allows investors to lock in profits while still giving them the opportunity to continue to profit if the stock's price continues to rise. It's also useful because it can help to reduce the emotional aspect of selling a stock, by automating the selling decision when the stock reaches a certain price.
Please note that trailing stops can only be placed on exchange-traded stocks and it is not guaranteed that the trade will execute at the exact trailing stop level.
Research that supports using trailing stops when trading stocks
There have been several research studies that have looked at the use of trailing stop orders in stock trading and their effectiveness in limiting losses and maximizing profits.
One study from the Journal of Finance in 2000, titled "Trailing Stop-Loss Orders: Do They Work?" found that using a trailing stop-loss order can help to limit losses and increase returns for investors. The study analyzed the performance of a portfolio of stocks using a trailing stop-loss strategy and found that the strategy was able to reduce the maximum drawdown (peak-to-trough decline) of the portfolio by up to 50%.
Another study from the Journal of Financial Economics in 2003, titled "Stop-Loss and Stop-Limit Orders in Stock Trading" found that using a trailing stop-loss order can help to increase returns and reduce the volatility of a portfolio of stocks. The study found that the use of a trailing stop-loss order increased the average return of a portfolio by 2.6% per year and reduced the volatility of the portfolio by 5.3% per year.
A study from the Journal of Banking and Finance in 2010, titled "Does the use of stop-loss orders improve stock market performance?" found that the use of trailing stop-loss orders can be effective in limiting losses and increasing returns for investors. The study found that the use of trailing stop-loss orders was associated with a reduction in the maximum drawdown of a portfolio and an increase in the average return of the portfolio.
3 Examples of using trailing stops in stocks
Below are examples of using our custom 3D Trailing Stop indicator on popular stocks and how it got you out safely before the trend accelerated on the downside. If you're interested in gaining access to the 3D Trailing Stop indicator, then visit our indicators page here https://www.clickcapital.io/tradingview-indicators
1) Tesla - $TSLA
Tesla has arguably been the hottest stock of the last decade, and it peaked in late 2021. Valuations and price performance had already been at ridiculous levels for several years so how were you suppose to know when to exit? well one way would have been to use our 3D trailing stop indicator on TradingView as shown in the chart above.
When the price closes below the blue line you exit your position, as shown with the orange arrow on the chart. You can see the trailing stop indicator gave the price room to move, however when it detected that the trend had changed it tightened up the stop and got you out near the high before price eventually tumbled back down to a $100 per share over the next year.
2) Snowflake - $SNOW
Another favorite from the late bull market was none other than Snowflake, leader of the cloud industry stocks who became significantly overvalued and overbought into the late stages of the bull market.
Unfortunately this name sucked in many retail traders, but only if they had our 3D trailing stop indicator would have they got out near the top and protected themselves from losing huge amounts of money in the subsequent and significant fall from grace this thing had.
Our custom trailing stop indicator for stocks got you out of SNOW around $360 per year as indicated by the orange arrow on the chart above. Today, one year later this stock is trading around $130 per share, that's 64% lower than where the 3D trailing stop got you out!
3) Peloton - $PTON
Oh boy you hate to see it, but the same thing happens in every bull market. The latest fad, craze, toy, etc.. comes to market and everybody jumps onto the stock with joy and tales of everlasting growth due to the "new paradigm".. This story is as old as the hills.. history doesn't always repeat but it does rhyme and you don't have to be caught up in the eventual implosion of these once loved market darlings.
That doesn't mean you can't profit from the huge run-up in prices either, it just means you have to have a disciplined process and methodology of when you should exit. One way to do that is with a proven tool, like our 3D trailing stop indicator. Look at the chart above, it got you out of PTON near the top around $97 per share. Just two years later this stock got down to as low as $6 per share representing a huge 90%+ drawdown from the top and unfortunately cost millions of investors millions of dollars in losses.
If you had used our custom trailing stop indicator for TradingView, you could have avoided these huge losses whilst still profiting handsomely from the huge run up.
Conclusion
As research has proven and with the examples above, using a trailing stop indicator on stocks has been shown to get you out of stocks that are about to turn downwards. Protecting your wealth is more important than growing it and that's what our 3D trailing stop indicator does. We have found it to be far more effective than traditional simple % and $ based trailing stops.
Our custom trailing indicator tells you exactly when to exit a stock, you just wait for it to close below the blue line and then sell it. No emotion, no relying on others, no being tricked by the company news or anybody else. Just trade based on hard and fast rules.
Using the 3D Trailing Stop indicator is easy, all you need is a free account at www.tradingview.com then order our indicators from this page https://www.clickcapital.io/tradingview-indicators and you can be using the 3D trailing stop indicator today!