Trailing Stop Vs Take Profit Target - When should you use what?
Summary
TLDRThis 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
📈 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.
🎯 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.
Mindmap
Keywords
💡trailing stop
💡profit target
💡trading system
💡stop loss
💡entry point
💡risk management
💡indicators
💡moving average
💡market trends
💡choppy markets
💡mytradingroutine.com
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.
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