Trailing Stops – The Long And Short Of It
Chris Tripp works on IG’s dealing floor in London. To find out more about CFDs visit: http://www.ig.com/uk/trading-cfds
Despite all the resources available to the modern investor, the demands of day-to-day life can mean that hours or sometimes days pass without the opportunity to monitor their portfolios. How can they maintain an element of control and potentially secure a profit without having to keep checking every two minutes? The answer might be by using a trailing stop, which is a tool often overlooked by investors.
By definition, the trailing stop is only available as a non-guaranteed stop and will follow your position on its upside, automatically updating to be the specified distance away, once the predefined ‘step’ has been breached. This allows users to potentially lock in any gains on their open positions and protect movements in their favour against adverse market conditions.
For example: If you were to open a position to buy £10 per point of the FTSE 100 at a price of 6500. On this position you could then add a trailing stop with a distance of 50 points (6450) and a step of 10 points. This means that each time the FTSE moves 10 points in your favour, your stop will automatically adjust to be 50 points away. If the FTSE then reaches a price of 6510 your stop will update from a level of 6450 to 6460, potentially locking in that 10 point (£100) upswing. If the market were then to move against me to a level of 6470 your stop would remain at the updated level of 6460.
As the market keeps moving in your favour, your stop can potentially be updated to your entry level or beyond thus locking in your profit. For the savvy investor this a useful tool for managing open positions.
You can also place trailing stops on your already open positions, allowing you to take advantage of these benefits on your more long-standing positions.
Spread bets and CFDs are leveraged products. Spread betting and CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.
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