Trailing Stops allow you to track profitable positions automatically.
Trailing Stops are placed a certain distance from your opening price, and remain at that distance when the market moves in your favour. So if you opened a long position on a share CFD priced at $35 with a Trailing Stop at $0.50 from the opening price, the Stop would remain $0.50 below the share price as it rose, then stay at the most favourable level should the market turn.
This type of Stop order means you do not have to manually monitor your stops and move them constantly. Instead, the Stop automatically trails the underlying market, helping to potentially lock in your profits in volatile markets.
You set the conditions for the Stop to move, including the distance from your opening level, and the 'Step' size - the size of the increments by which the Stop can move. Trailing Stops can be used on long or short trades, helping you to secure you gains as the market moves.
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 (2 contracts x A$5) 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:
Gross profit on trade
| 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, potentially 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.
Setting up a Trailing Stop
There is no charge to use a Trailing Stop. However, you must first activate Trailing Stops for your account on PureDeal. To do this, simply:
- Go to My Account, at the top left of the screen
- Select Settings, then Preferences
- Select Allow Trailing Stops
- Accept the special terms and conditions
- Click Set Preferences
You will find a Trailing Stop check-box on your Deal Ticket for currency trades, plus selected indices, shares and commodities.