Example: Trailing Stop
Here is an simple scenario explaining how to 'lock in' profits in volatile markets by using a Trailing Stop*.
Example: Buying Australia 200 Cash with a Trailing Stop
Say you buy two Mini A$5 Australia 200 Cash contracts at 5350. Each contract equates to A$5 per point movement, so you are exposed to A$10 of loss or gain per point. You choose a Trailing Stop distance of 20 points and a Step size of 10 points. The Stop initially sits 20 points behind your opening price, at 5330.
Immediately the Australia 200 Cash starts to rise. Very soon our price has risen to 5360 (10 points above your opening price) and your Stop 'steps' up by 10 points to 5340 to re-establish a 20-point distance from the new market level.
The rally continues and by lunchtime the Australia 200 Cash is trading at 5425. Your Stop has therefore moved automatically six more times and you are now sitting on a healthy potential profit with your Stop waiting 25 points behind at 5400.
A surprise announcement that China will limit the importation of Australian commodities suddenly sends the Australia 200 Cash plummeting and within minutes the Australia 200 Cash is trading back down at 5352.
Your Trailing Stop has kicked in and your position is closed 25 points below the recent high at 5425, still well above your opening price of 5350.
Your gross profit on the trade is calculated as follows:
| Closing Level | 5400 |
| Opening Level | 5350 |
| Difference | 50 |
Gross profit on trade: 50 x A$10 per point = A$500
To determine the net or overall profit on the transaction you also have to take account of the commission you have paid and the interest and dividend adjustments.
With a conventional Stop Order you would still be in the market, looking at a relatively small paper profit.
By contrast with a Trailing Stop you are able, in this scenario, to profit from a volatile market.
*A stop order may not limit your risk in times of rapid market movement. In such cases the market may move through your stop in which case your order will be filled at the best available price.