A trailing stop loss is an important part of the trade because it lets you protect your profits. Traders would agree that many times the trade hits the stop loss even though it was profitable a few minutes back. The trailing stop is used to protect this and to ensure that once the trade starts to move in your direction it is protected and in no circumstance would result in a loss.
How to start trailing your stop loss
Assume that you are going long on a trade. You are bullish about a particular stock and have
technically analyzed it and have found a good support level where you wish to go long. You
place your initial stop loss a few points below the support level.
Once the price hits the support level you are long in the trade. Wait for some time and let the trade start moving in your direction. If it moves in your direction then you are out of the trade when the price hits the stop loss.
However, if the trade starts to move in your favor and you see that you are making profits then you should save your profits. You thus start to think about trailing your stop loss.But which is the best way to do it.
Trailing stop loss
Every asset will have an upward and then a corrective move. So suppose you are long on trade and want to trail your stop loss then wait for the stock to make a high and correct. When the stock has made the correction and has started moving up again wait for it to cross the last high. As soon as the stock does that you can place the trailing stop loss where the price started going up after the corrective move.
You need to keep doing this till the stock hits the trailing stop loss. Once the price hits the trailing stop loss you are out of the trade.
Why is this method a logical way to trail stop loss?
If the stock is in an uptrend then it is making higher highs and higher lows. Your trailing stop loss is placed below the low. When the stock price makes lower lows it is that time that it could indicate that the trade is changing the course of direction. This could mean that the trend is changing and thus you need to be out of this trade soon.