Dollar Trailing Stop Definition
The Dollar Trailing Stop is one way to limit losses and protect profits. A stop loss order is set a given dollar amount away from the current stock price per share. As the price moves in the trade’s favor, the stop rachets along with, never giving ground once its protected by the stop. For example, after buying long, a trader may set a trailing stop $1 below the current price. As the price moves up, the trader moves up the stop but never moves it down when the price goes down. Eventually the price does retrace the $1, the stop is hit, and the trade exits.
Extra Insight:
In backtesting, the same dollar stop value is applied to all stocks. This is not ideal because each stock has a different daily price range. For example, setting the stop $1 away from the price of a $10 stock makes a fairly wide stop but the same $1 stop on a $100 stock is very tight.
As with all trailing stops, the dollar trail never exits at the extreme of a movement. Hence it always gives back some of the profits.
Click here for BackTesting Reports on Trailing Stops
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Last updated 11/11/08.
October 29th, 2008 Filed under Glossary
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