What is the difference between a trailing stop and a stop-loss order?

What is the difference between a trailing stop and a stop-loss order?

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1 answer

Member

by bell , 9 months ago

@vincenzo.murazik 

A trailing stop and a stop-loss order are both risk management tools used in trading, but they have some key differences:

  1. Function: Stop-Loss Order: A stop-loss order is placed to limit losses by setting a specific price at which a position will be automatically sold. It is typically used to exit a trade if the price reaches a predetermined level, minimizing further losses. Trailing Stop: A trailing stop is a dynamic stop-loss order that adjusts with the price movement. It allows traders to set a specific percentage or dollar amount trailing the highest price achieved since the order was placed. If the price falls, the stop-loss moves downward, but if the price increases, the stop-loss order also adjusts higher, aiming to protect profit.
  2. Execution: Stop-Loss Order: Once the price hits the specified stop-loss level, a stop-loss order becomes a market order and is executed immediately at the next available price. Trailing Stop: A trailing stop moves whenever the price moves favorably, maintaining a certain distance behind the highest achieved price. If the price falls and reaches the trailing stop level, it becomes a market order and is executed like a stop-loss order.
  3. Purpose: Stop-Loss Order: It is primarily used to limit potential losses and minimize risk. Traders often use stop-loss orders to manage downside risk by having a predetermined exit point. Trailing Stop: The purpose of a trailing stop is to protect profits and allow traders to stay in a profitable trade as long as the trend continues. It provides flexibility by adjusting the stop-loss level based on the price movement.


In summary, a stop-loss order sets a predetermined price to exit a trade if the price reaches that level, while a trailing stop adjusts the stop-loss level as the price moves favorably, aiming to protect profits and potentially extend gains.