Risk management is the most important part of your trading plan. Before entering any trade, you should have a good idea of where you want to exit, and where you want to take advantage. There are occasions when the market starts trending and to take advantage of this type of movement. You can consider employing a trailing stop.
A trailing stop loss runs along with the market and continues to climb as the market climbs. Here are some ways to place a trailing stop loss.
1) You can use a percentage level below or above to change your stop loss. Once the stock reaches your profit level, you can increase your stop loss at a price that is X percent below the market. As the market climbs, you can change your stop loss level on a daily basis to increase the stop point.
For example, X stock increased from 80 to 89 in June, if you bought it for 89, you could set a stop loss at 5% (95% of the stock’s value at 89 is 84.5). After each stop you will probably change the price of the following stop loss, which will increase or decrease as the market changes. The price used to determine your trailing stop loss is subjective, but is usually a good target at the close of the day.
2) You can use a trailing stop loss based on the lowest compared to the previous days. Here you can use support levels (or resistance when the market falls) to change the stop loss level based on the major support on the price. Since this methodology is more accurate, you may need to be more proactive in determining your stop levels.
3) You can use a medium-term moving average. Here you can target your stop loss as a medium-term moving average. For example, you can buy X and hold it until it crosses below the 50-day moving average. If the stock price keeps climbing, you can hold the position until a stop loss is breached.
4) You can use a long term moving average. In this situation, the share price can wait below a long-term moving average until you exit your position.
5) You can use trend line support (or resistance). In this example your trending stop loss will increase with the slope of a trend line and you can hold on to your long (or short) position. Until the value of the security below (or above) your trend line stops.