How to Use a Trailing Stop Loss (Lock in Profits)
Buying a stock is easy; selling it is hard. Sell too early, and you miss the moonshot. Sell too late, and you give back all your gains. The Trailing Stop Loss is the only tool that solves both problems automatically. It acts like a ratchet: it follows the stock price up as it climbs, but locks in place the moment the price turns down. Here is how to set the perfect “trailing percentage” to let your winners run while protecting your downside.
1. The Rule: The “Ratchet” Effect
It creates a floor that only moves up, never down.
• Price Rises: You pull the cart up. The stop price increases.
• Price Dips: You put a wedge under the wheel. The stop price stays put.
• Trend Reverses: The cart hits the wedge. You sell and keep the profit made during the climb.
2. Fixed vs. Trailing (Checklist)
See why the Trailing Stop captures more profit in a bull run.
| Scenario | Fixed Stop ($90) | Trailing Stop (-10%) |
|---|---|---|
| Buy at $100 | Risk limited to $10. | Risk limited to $10. |
| Rises to $150 | Stop is still $90. Profit at Risk: $60 |
Stop moved to $135. Profit Locked: $35 |
| Drops to $130 | You hold (and watch profit vanish). | SOLD at $135. You walk away rich. |
3. Timeline: Anatomy of a Winning Trade
Here is how a Trailing Stop Loss executes in real-time on a volatile stock like NVIDIA.
| Stock Action | Stop Price | Status |
|---|---|---|
| Buy @ $100 | $90.00 | |
| Rally to $120 | $108.00 | |
| Dip to $115 | $108.00 | |
| Crash to $100 | Sold @ $108 |
4. Strategy: Setting the Right Distance
The “Whipsaw” is your enemy.
- Too Tight (e.g., 2%): You will get stopped out by random noise before the big move happens. This is “Death by a thousand cuts.”
- Too Loose (e.g., 20%): You give back too much profit before exiting.
- The Sweet Spot: Generally 10% to 15% for volatile tech stocks, or 5% to 8% for stable ETFs. Adjust based on the stock’s “Beta” (volatility).
5. Warning: The “Gap Down”
Stops don’t work when the market is closed.
⛔ Overnight Risk
Your stop is at $108. The stock closes at $115. Bad news hits at midnight.
- The Opening: The stock opens the next morning at $90.
- The Execution: Your “Sell at $108” order becomes a “Market Order.” You are sold instantly at $90, not $108.
- Reality: A Stop Loss is not a guarantee of price; it is a trigger for an order. It cannot protect you from massive overnight gaps.