Trailing Stop Vs Take Profit Target - When should you use what?

Summary

This video script discusses the distinction between a trailing stop and a profit target in trading, essential components of a trading system. It explains the concept of a stop loss to limit risk and then delves into the two exit strategies: setting a fixed profit target to exit when a stock reaches a certain price, and using a trailing stop to move the stop loss higher as the stock price increases. The speaker shares a preference for profit targets due to the current volatile market conditions and provides insights on how to implement trailing stops based on fixed amounts or moving averages. The script concludes by directing viewers to a website for further guidance on setting stop losses and profit targets.

Takeaways

• 📈 A trading system comprises three components: knowing what to trade, when to enter, and when to exit.
• 📊 The speaker prefers trading stocks and options and uses indicators to determine the entry point.
• 🔍 A stop loss is used to limit risk by setting a lower exit point to prevent significant losses.
• 💰 A profit target is a predetermined price level at which to take profits, like exiting at $120 if the entry was at $100.
• 📉 A trailing stop adjusts the stop loss upward as the stock price increases to lock in profits.
• 🔄 Trailing stops can be adjusted by fixed amounts or based on indicators like moving averages with small settings.
• ⚖️ The advantage of a trailing stop is capturing larger moves, but it can be less effective in choppy markets.
• 🏁 The speaker prefers using profit targets over trailing stops due to the current market's short-lived trends.
• 🌐 More information on setting stop losses and profit targets can be found at the speaker's website, mytradingroutine.com.
• 👍 The video encourages viewers to like, comment, and suggest new topics, highlighting the interactive nature of the content.

Q & A

What are the three components of a trading system as mentioned in the script?

The three components of a trading system are knowing what to trade, when to enter the trade, and when to exit the trade with either a profit or a loss.

What does the speaker prefer to trade and why?

The speaker prefers trading stocks and options, although the specific reasons for this preference are not provided in the script.

How does the speaker determine the entry point for a trade?

The speaker uses indicators to determine the exact entry point for a trade.

What is a stop loss and how does it limit risk in trading?

A stop loss is a predetermined price at which a trade is automatically closed to prevent further losses. It limits risk by setting a maximum amount one is willing to lose on a trade.

What is the difference between a profit target and a trailing stop?

A profit target is a predetermined price at which a trader exits a trade to lock in profits. A trailing stop is a stop loss that moves with the market price, allowing profits to run but cutting losses if the price reverses.

How does a trailing stop function in the context of a rising stock price?

A trailing stop moves higher as the stock price increases, allowing the trader to capture more of an upward move while still having a stop loss in place to protect gains.

What is the advantage of using a trailing stop according to the script?

The advantage of using a trailing stop is that it allows a trader to capture a larger move in the market, protecting profits as the stock price continues to rise.

Why does the speaker prefer a profit target over a trailing stop?

The speaker prefers a profit target because they find that markets are often choppy with short-lived trends, and they want to exit the market as soon as the profit target is hit.

What are the different ways to set a trailing stop as mentioned in the script?

The script mentions setting a trailing stop by using a fixed amount, such as moving the stop loss up by a dollar for every dollar the stock price rises, or basing it on indicators like a moving average with a small setting.

What is the recommended approach if a trader wants to use a moving average for a trailing stop?

If using a moving average for a trailing stop, the trader should use a moving average with a small setting, such as 3, 5, or 7, to ensure the stop loss stays close to the current prices.

How can viewers learn more about the speaker's trading strategies including stop loss and profit target placement?

Viewers can visit the website mytradingroutine.com to learn more about the speaker's trading strategies, including how to place stop losses and determine profit targets.

Outlines

00:00

📈 Understanding Trading Exit Strategies: Stop Loss, Profit Target, and Trailing Stop

This paragraph introduces the concept of exit strategies in trading, specifically focusing on stop loss, profit target, and trailing stop. It emphasizes the importance of having a trading system with three components: knowing what to trade, when to enter, and crucially, when to exit for both profit and loss. The speaker illustrates the use of a stop loss to limit risk and introduces the idea of setting a profit target versus using a trailing stop, which adjusts the stop loss as the stock price increases. The paragraph sets the stage for a detailed comparison of these strategies.

05:01

🎯 Personal Preference for Profit Targets Over Trailing Stops

In this paragraph, the speaker shares personal insights and preferences regarding trading exit strategies. They explain that while a trailing stop can capture larger market moves by adjusting the stop loss as the stock price rises, they find profit targets more effective due to the current market's tendency for short-lived trends. The speaker prefers to take profits when a predetermined target is hit, rather than waiting for a potentially larger but less consistent gain from a trailing stop. They also mention different methods for setting a trailing stop, such as using a fixed amount or basing it on indicators like a moving average. The paragraph concludes with an invitation for viewers to learn more about the speaker's trading routine on their website and an encouragement for viewer engagement and topic suggestions.

Keywords

💡trailing stop

A trailing stop is an order placed by an investor to sell a security when it falls to a certain price, which is a specified amount below the trade's high-water mark. In the video, the concept is explained as moving the stop loss higher as the stock price increases, allowing the investor to capture larger gains while still limiting potential losses. The example given is moving the stop loss from $90 to $95 as the stock price rises to $105.

💡profit target

A profit target is a predetermined price at which an investor plans to sell a security to lock in profits. It is a key component of the trading system discussed in the video, where the speaker prefers to use a profit target over a trailing stop, as it allows for exiting the market once a certain profit level is reached, such as selling when the stock price hits $120.

💡trading system

A trading system refers to a set of rules or strategies that determine when to enter and exit trades. The video outlines three components of a trading system: knowing what to trade, when to enter, and when to exit for profit or loss. The speaker emphasizes the importance of having a well-defined trading system for successful stock and options trading.

💡stop loss

A stop loss is an order placed with a broker to sell a security when it reaches a certain price, typically used to limit an investor's loss on a position. In the context of the video, the stop loss is set at $90 when entering a trade at $100, serving as a risk management tool to prevent significant losses if the stock price drops.

💡entry point

The entry point in trading is the price at which a position is opened. The video discusses the importance of using indicators to determine the exact entry point for a trade, which is a critical aspect of the trading system to maximize potential gains and minimize risk.

💡risk management

Risk management in trading involves the identification, evaluation, and prioritization of risks followed by coordinated efforts to minimize, monitor, and control the probability or impact of unfortunate events. The video highlights the use of stop losses and trailing stops as part of risk management strategies to limit potential losses while trading.

💡indicators

In the context of trading, indicators are statistical tools used by traders to make decisions about the entry and exit points of trades. The speaker in the video mentions a preference for using indicators to determine entry points, suggesting that they can provide valuable insights into market trends and potential trading opportunities.

💡moving average

A moving average is a widely used indicator in technical analysis that helps smooth out price data by creating a constantly updated average price. The video discusses using a moving average, specifically with a small setting like 3, 5, or 7, to determine the position of a trailing stop, ensuring that it remains close to current prices.

💡market trends

Market trends refer to the general direction in which prices are moving in the stock market. The speaker in the video notes that current market trends are short-lived, often with stocks moving up a bit and then down, which influences their preference for using a profit target over a trailing stop.

💡choppy markets

Choppy markets describe a condition where the price of a security moves erratically with no clear trend, either up or down. The video speaker mentions that they believe current markets are quite choppy, which is why they prefer setting a profit target to exit trades rather than relying on a trailing stop.

💡mytradingroutine.com

This is a website mentioned in the video script that the speaker has set up to provide further information on trading strategies, including how to place stop losses and determine profit targets. It serves as a resource for viewers interested in learning more about the speaker's trading approach.

Highlights

The importance of having a trading system with three components: knowing what to trade, when to enter, and when to exit.

Preference for trading stocks and options as the 'what to trade' component.

Use of indicators for determining exact entry points in trading.

Concept of stop loss to limit risk in trading.

Explanation of a profit target as a strategy for taking profits at a certain level.

Introduction to the concept of a trailing stop and its function in trading.

Mechanism of a trailing stop, moving the stop loss higher as prices increase.

Advantage of a trailing stop in capturing larger market moves.

Disadvantage of trailing stops in short-lived market trends.

Personal preference for profit targets over trailing stops due to market volatility.

Different methods of setting a trailing stop, including fixed amounts and indicators.

Use of moving averages with small settings for stop loss based on indicators.

Pros and cons of trailing stops versus profit targets in current market conditions.

Personal experience sharing that profit targets outperform trailing stops for the speaker.

Invitation to learn more about stop loss and profit target strategies on the speaker's website, mytradingroutine.com.

Encouragement for viewers to like, comment, and share the video for further assistance and topic suggestions.

Acknowledgment of viewer suggestions and commitment to covering requested topics in future content.

Transcripts

So what is the difference between a

trailing stop and a profit

target? And which of these two

is better? And that's what we're

going to talk about right

now.

So when trading you do need

to have a trading system.

And there's three components

to a trading system.

The first one is, you need to know

what to trade, right?

And as you know I prefer

trading stocks and options.

Number two, you need to know when

to enter. And as you know, I like

to use indicators to

determine my exact entry point.

And number three, you also need

to know when to exit.

When to exit with a profit and

when to exit with a loss.

So this is where the idea

of a stop loss, a profit

target and a trailing stop

comes in.

So, let me show you exactly

what I mean by that.

Let's say you have

a stock.

And I'm drawing it on this side,

so this way we can all see it even

if I'm in the screen, and of course

a stock goes like this.

And you expect the stock

to continue to go up.

So at some point, you're having

an entry right here.

So this is where you would enter.

And let's say we are entering at

at $100.

You're expecting the stock to go up

so this means that you would put a

stop loss below the

current price and let's just say,

you're using a stop loss right

here.

Which would be for example, at

$90.

On the other hand, so, this is how

you limit your risk by using

a stop loss.

Now the key question is when do you

take profits?

And there's two key concepts, you

can either have a profit

target, and this is what I

personally like to do.

As soon as you see that the stock

goes up to a certain level,

here for example to

$120 you are taking profits.

But let's talk about a trailing stop

because that's a question that I

receive all the time.

"Shouldn't I use a trailing

stop?" How does this work?

What does a trailing stop do?

A trailing stop, in a nutshell,

works like this: as prices

move higher you move

your stop loss higher.

So, if initially you start

at $90 and

let's say prices are going up

right here to

$105, as the prices

move up you move your stop loss up

meaning, that you would move your

stop loss right here

from $90

to let's say, $95.

Can probably just erase the $90

you get the idea.

We move higher to $95

So if for example now,

the stock keeps going higher and

moves to $110

so you move your stop loss

again and you determine

the interval.

You can move it every 20

cents that a stock moves, or

every 50 cents or every

dollar or, as I just did

here in this example, for

every five dollars.

It doesn't really matter.

What is the advantage and

disadvantage of having

a trailing stop?

Well the advantage is that you are

capturing a larger move.

So if the stock keeps going higher,

and higher and higher, you keep

trailing your stop and the idea

is to capture a larger

move.

However, I found that these days

the markets the trends

are short lived, and that

often the stock moves up a

little bit and then it goes down.

And this is why I personally

like to use a profit target.

I want the market to come to

me. So as soon as the profit

target is hit, I'm out

of the market.

What are the different ways

to work with a trailing stop?

So first of all, as I just said,

you could use a fixed amount.

Means, for example, as the stock

goes up a dollar, you move your stop

loss up by a dollar.

Another way is to do it based

on indicators.

And one of the most popular ways to

do it, it's doing it based

off a moving average.

Now if you want to move your stop

loss based on a moving average,

you need to use a moving average

with a rather small setting.

Like for example, with the setting

of 3, 5 or 7.

This way you make sure that

your stop loss stays close

to the current prices, that

you don't give the trade too

much room.

Just in a nutshell, what are

the pros and cons?

With a trailing stop

you are expecting for the market

to have a way larger move

so that it really moves

nice and up, and with the

profit target you rather

estimate that these days the markets

are quite choppy and going up a

little bit and then immediately

going down. So this is why I

personally like to use

a profit target.

I found that for me personally a

profit target is outperforming

a trailing stop and that's why

I like to use it.

By the way, if you would like to

know how exactly I

place my stop loss

and how I also determine my

profit target, then go to

a website that I set up for you it's

called mytradingroutine.com.

Now you know the difference between

a trailing stop and a profit

target.

And I hope that this helps you in

your trading.

If this was helpful please like

this video.

Leave a comment and let me know

if this is making sense.

Also, let me know if there's any

other topics that you want me to

cover because, as you can see

I'm keeping a "Post-it" note

with your suggestions here.

And a trailing stop was a suggestion

from two days ago so I just crossed

it off and I have two more topics

that I have written down here.

But if you have anything that you

would like me to cover, please leave

a comment, like this video and of

course feel free to share it.

Make sure that you're subscribing to

it on Youtube.