For Scalping or Day Trading with Shorting

Using a Trailing Stop Loss Order can help minimize potential losses and lock in any existing profits, in one order entry.

On my other overview of a Trailing Stop Order page, I mentioned that you can set the trailing amount in either dollars (or cents), or using a percentage.

In the following examples you will see that I have used a trailing amount in cents.

The method you choose is a matter of personal preference and how it fits into your trading plan. One way is not better to use than another but rather a preference as to what you feel more comfortable with and what works with your strategy.

The first chart below shows an example of entering a short position trade at a price of $8.80 and at the same time we enter a Trailing Stop Loss order and set the trail amount to .30 (30 cents).

As the stock price moves lower, the trailing stop order will automatically move down also, staying 30 cents above the stock price.

The next chart below shows the same example with more detail about the order price movement as the stock price moves lower, and then moves higher.

You can see that as the stock price hits $7.98 just before 10:00 a.m. the trailing stop loss order has followed the stock down and is now at $8.28 automatically.

Now as the stock price moves higher, the trailing stop order stays at $8.28, it does not move higher. This is how it helps lock in any potential profits.

As the price rises to $8.28, the order is triggered and sent in to be executed as a market order.

In this case, the order was able to help lock in profits by not allowing you to have to rely on your emotions to determine when to get out of the trade. Although the price eventually moved even lower, you made a profit and that is your goal.

Now let’s take a look at another example of using a Trailing Stop Loss order with the same chart but this time we will use a .50 (50 cent) trailing amount.

By using 50 cents as the trail amount in this particular example, we are able to stay in the trade longer, and add a considerable amount of profit to the trade. The stock went all the way down to $7.40 by noon, which would bring our trailing stop price to $7.90, or 50 cents above the stock price.

Determining the amount to use for the trail amount is not an exact science. One way to figure out what to use would be to keep a good trading journal and look at your past trades to see what amount would have produced larger profits in a large percentage of trades, without adding too much risk of loss to your trades.

It takes some practicing to figure this out, and each person and trading plan would be different.