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Trailing Stop Loss: what it is and how it works

Trailing Stop Loss aka the Stop Loss move. The feature is that the Stop Loss level works depending on whether the position is Buy or Sell. In this article, we discuss how Trailing Stop Loss works with buy orders on eToro.

The way trailing stop loss with sell order works on eToro, you think the opposite.

What is Trailing Stop Loss?

The Trailing Stop Loss places a stop-loss order at a fixed range above or below the market price, depending on whether the position is SELL or BUY.

As long as the market moves in your favor, the stop loss will move with it, keeping the same locked distance from the current market rate.

The principle of Trailing Stop Loss with buy orders is simple:

  • The price rises and the stop loss is automatically increased according to the preset fixed distance.
  • When the price falls, the stop loss stops, it does not fall.

How to Work Trailing Stop Loss on eToro

When you select Trailing Stop Loss in the order, the Stop Loss is increased based on the fixed distance set previously if the price rises. If the price falls, like the average Stop Loss, tapping Stop Loss will close the order.

You have the option to set your stop loss as soon as you open the trade or at any time thereafter.

All you have to do is click “Stop Loss” in the Open Trades window and Trailing Stop Loss appears below. The fixed price gap is updated accordingly if you manually change the Stop Loss while the Trailing Stop Loss is active.

When should you use Trailing Stop Loss?

Our advice is that trailing stop loss should only be applied when you are already profitable and satisfied with the profit of your open buy order. However, if you close the price, the price will continue to rise. You want to increase your profits while preserving your existing profits.

However, keep in mind that on eToro, only when the order is already profitable can you set stop losses in a positive way and the Stop Loss must be less than or equal to the profit as shown below.

Here is an example that illustrates a specific case where trailing stop loss works and why it should only be used when the order is already profitable:

Place a buy order at 100 USD/share. Set the Stop Loss to 80 USD and activate the Sliding Stop Loss. So the fixed distance level is 20 USD.

– Case 1: Then the price increases to 110usd, Stop Loss automatically increases to 90usd. After that, the price drops to 100 USD, the Stop Loss is still at 90 USD.

If the price rises again to 105 USD, the Stop Loss is still at 90 USD because it is based on a fixed distance of 20 USD from the higher price of 110 USD.

But if the price rises to 115 USD, then Stop Loss again at 95 USD. And now the price drops and reaches 95usd, the order is cut to 95usd.

=> Then you buy at 100 USD, set a stop loss of 80 USD and have a stop loss at 95 USD. So, this case explains why the trailing stop should be used only when there is a profit, avoiding unnecessary closures because the price is constantly fluctuating.

– Case 2: Then the price drops to 90 USD, the Stop Loss remains at 80 USD. The price drops to 80 USD, the Stop Loss is triggered and the order is closed.

Trailing Stop Loss is the moving stop loss, not fixed like the Stop Loss. So make sure you have a good understanding of how it works before using it in trading.

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