So what is the difference between a
trailing stop and a profit
target? And which of these two
is better? And that's what we're
going to talk about right
now.
So when trading you do need
to have a trading system.
And there's three components
to a trading system.
The first one is, you need to know
what to trade, right?
And as you know I prefer
trading stocks and options.
Number two, you need to know when
to enter. And as you know, I like
to use indicators to
determine my exact entry point.
And number three, you also need
to know when to exit.
When to exit with a profit and
when to exit with a loss.
So this is where the idea
of a stop loss, a profit
target and a trailing stop
comes in.
So, let me show you exactly
what I mean by that.
Let's say you have
a stock.
And I'm drawing it on this side,
so this way we can all see it even
if I'm in the screen, and of course
a stock goes like this.
And you expect the stock
to continue to go up.
So at some point, you're having
an entry right here.
So this is where you would enter.
And let's say we are entering at
at $100.
You're expecting the stock to go up
so this means that you would put a
stop loss below the
current price and let's just say,
you're using a stop loss right
here.
Which would be for example, at
$90.
On the other hand, so, this is how
you limit your risk by using
a stop loss.
Now the key question is when do you
take profits?
And there's two key concepts, you
can either 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.
But let's talk about a trailing stop
because that's 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?
A trailing stop, in a nutshell,
works like this: as prices
move higher you move
your stop loss higher.
So, if initially you start
at $90 and
let's say prices are going up
right here to
$105, as the prices
move up you move your stop loss up
meaning, that you would move your
stop loss right here
from $90
to let's say, $95.
Can probably just erase the $90
you get the idea.
We move higher to $95
So if for example now,
the stock keeps going higher and
moves to $110
so you move your stop loss
again and you determine
the interval.
You can move it every 20
cents that a stock moves, or
every 50 cents or 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.
So if the stock keeps going higher,
and higher and higher, you keep
trailing your stop and the idea
is to capture a larger
move.
However, I found that these days
the markets the 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?
So first of all, as I just said,
you could use a fixed amount.
Means, for example, 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, it's 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.
Just 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, and 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. So 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.
By the way, if you would like to
know how exactly 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 mytradingroutine.com.
Now you know the difference between
a trailing stop and a profit
target.
And I hope that this helps you in
your trading.
If this was helpful please like
this video.
Leave a comment and let me know
if this is making sense.
Also, let me know if there's any
other topics that you want me to
cover because, as you can see
I'm keeping a "Post-it" note
with your suggestions here.
And a trailing stop was a suggestion
from two days ago so I just crossed
it off and I have two more topics
that I have written down here.
But if you have anything that you
would like me to cover, please leave
a comment, like this video and of
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