What is a Trailing Stop?

A trailing stop is a stop price set at a defined percentage below the current market price of the position. As the market price rises, the stop price also rises. If the market price falls, the stop price does not change.

NOTE: For a short position, the trailing stop is reversed. It is set at a defined percentage above the market price. As the market price falls, the trailing stop will also fall. If the market price rises, the stop price would stay the same.

Example:
  • Let’s say you buy a stock for $10. If you use a 20% trailing stop, you would sell that stock if it ever closed below $8. That’s 20% below $10.
  • However, if the stock went up from $10 to $20, you would move your trailing stop up to $16. That’s 20% below the new closing price of $20. If the stock closes below $16, you sell and make a 60% profit. 
  • The use of a trailing stop is designed to help you avoid pulling your profits out too early or holding onto a losing stock for too long.

But, does a one-size-fits-all trailing stop work for all stocks? Not all stocks are equal. Some stocks are highly stable, like Johnson & Johnson. They don’t need much wiggle room. Other stocks are highly volatile, like Tesla, and need more room for market moves. 

We developed the Volatility Quotient to solve this problem. The Volatility Quotient acts as a customized trailing stop for each qualifying stock within our database. Just like with a traditional trailing stop, the VQ stop will adjust as the market price of a stock goes up and will remain the same as the market price goes down.

To learn more about the Volatility Quotient, go here.

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