Types of Trading Orders: Stop Loss vs. Profit Target

Types of Trading Orders

Types of trading orders: What is the difference between a trailing stop and a profit target? And which of these two is better? That’s what we’re going to talk about right now.

When trading you need to have a trading system.

There are 3 components to a trading system that you need to know:

  1. What to trade. I prefer trading stocks and options
  2. When to enter. I like to use indicators to determine my exact entry point
  3. When to exit, with a profit or with a loss

This is where the idea of a stop loss, a profit target and a trailing stop, different types of trading orders, come in.

Let’s discuss types of trading orders

types of trading orders

Let me show you exactly what I mean.

Let’s say you have a stock and you expect the stock to continue to go up. So at some point, you’re having an entry.

And let’s say you enter at $100. You’re expecting the stock to go up, so this means that you would put a stop loss below the current price, which for example would be at $90.

On the other hand, this is how you limit your risk by using a stop loss.

Now the key question is when do you take profits?

There are two key concepts. One, you can have a profit target, and this is what I personally like to do.

As soon as you see that the stock goes up to a certain level, here for example to $120, you are taking profits.

And two, there’s a trailing stop.

Let’s talk about a trailing stop

This is a question that I receive all the time: “Shouldn’t I use a trailing stop?” How does this work? What does a trailing stop do?

In a nutshell, a trailing stop works like this: as prices move higher you move your stop loss higher.

If initially you start at $90, and prices are going up to $105, as the prices move up you move your stop loss up. Meaning you would move your stop loss from $90 to $95.

If for example, now the stock keeps going higher and moves to $110, you move your stop loss again and you determine the interval.

You can move it every 20 cents that a stock moves, every 50 cents, every dollar or, as I just did here in this example, for every five dollars. It doesn’t really matter.

What is the advantage and disadvantage of having a trailing stop?

Well the advantage is that you are capturing a larger move.

If the stock keeps going higher and higher, you keep trailing your stop and the idea is to capture a larger move.

However, I found that these days the market trends are short lived and that often the stock moves up a little bit and then it goes down.

And this is why I personally like to use a profit target. I want the market to come to me. So as soon as the profit target is hit, I’m out of the market.

What are the different ways to work with a trailing stop?

First of all, you could use a fixed amount. Meaning, as the stock goes up a dollar, you move your stop loss up by a dollar.

Another way is to do it based on indicators. And one of the most popular ways to do it is doing it based off a moving average.

Now if you want to move your stop loss based on a moving average, you need to use a moving average with a rather small setting. Like for example, with the setting of 3, 5 or 7.

This way you make sure that your stop loss stays close to the current prices, that you don’t give the trade too much room.

In a nutshell, what are the pros and cons?

With a trailing stop you are expecting for the market to have a way larger move so that it really moves nice and up.

With the profit target you rather estimate that these days the markets are quite choppy and going up a little bit and then immediately going down.

This is why I personally like to use a profit target. I found that for me personally, a profit target is outperforming a trailing stop and that’s why I like to use it.

If you’d like to know exactly  how I place my stop loss and how I also determine my profit target, then go to a website that I set up for you it’s called www.mytradingroutine.com.

Now you know the difference between a trailing stop and a profit target. I hope that this helps you in your trading.

Read Next: How to Deal With Information Overload



Related Posts

How to Generate Systematic, Repeatable, and Consistent (SRC) Profits

How to Generate Systematic, Repeatable, and Consistent (SRC) Profits

Limit Order vs Stop Order – What’s The Difference?

Limit Order vs Stop Order – What’s The Difference?

What’s The Best Stock Market Simulator? Why Do You Need One?

What’s The Best Stock Market Simulator? Why Do You Need One?

Best TradingView Setup For The PowerX Strategy

Best TradingView Setup For The PowerX Strategy

Leave a Reply


Your email address will not be published. Required fields are marked

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}