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:
- What to trade. I prefer trading stocks and options
- When to enter. I like to use indicators to determine my exact entry point
- 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
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.
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