How to Use Trailing Stop in Thinkorswim

Imagine this: you're riding high on a winning trade, watching your gains swell. You know that the market can turn on a dime, and you're eager to lock in profits without sacrificing the potential for even greater returns. This is where the trailing stop comes into play—a tool that can help you manage risk while letting your profits run. In this comprehensive guide, we'll delve deep into how to use trailing stops in Thinkorswim, providing you with the knowledge you need to make the most of this powerful feature.

Understanding Trailing Stops

A trailing stop is a type of stop-loss order that moves with the market price. Unlike a fixed stop-loss, which remains at a set price, a trailing stop adjusts itself as the price of the asset changes. This dynamic nature allows you to secure gains and limit losses based on the asset’s performance. The trailing stop order is particularly valuable in volatile markets where prices can fluctuate rapidly.

Setting Up Trailing Stops in Thinkorswim

1. Accessing the Order Entry Screen

   To set a trailing stop in Thinkorswim, start by opening the Order Entry screen. You can access this screen by navigating to the “Trade” tab on the Thinkorswim platform. Click on “Active Trader” or “Order Entry” to bring up the necessary order forms.

2. Choosing the Trailing Stop Order Type

   Once you're on the Order Entry screen, you need to select the type of order you want to place. For a trailing stop, choose “Sell” if you’re closing a long position or “Buy” if you’re closing a short position. Then, select “Trailing Stop” from the order type dropdown menu.

3. Configuring the Trailing Stop Parameters

   After selecting the trailing stop order type, you'll need to set the parameters for your trailing stop. Thinkorswim offers two main options for configuring your trailing stop:

   • Trailing Amount: This is the fixed dollar amount or percentage by which the stop will trail the current market price. For example, if you set a trailing stop of $1.00 and the asset's price moves up to $50.00, your trailing stop will be set at $49.00. If the price then falls to $49.00, your order will be triggered.

   • Trailing Stop Percentage: Alternatively, you can set the trailing stop as a percentage of the current market price. For example, if you set a trailing stop of 5% and the price of the asset rises to $100.00, your trailing stop will be set at $95.00. If the price drops below $95.00, your order will be executed.

4. Reviewing and Confirming Your Order

   Before finalizing your trailing stop order, review all details to ensure accuracy. Check the order type, trailing stop parameters, and other relevant details. Once everything looks correct, confirm and submit your order. Your trailing stop will now be active and will adjust automatically as the price of your asset changes.

Advantages of Using Trailing Stops

1. Profit Protection

   The primary advantage of trailing stops is their ability to lock in profits. As the price of an asset rises, the trailing stop moves up with it, ensuring that you don’t give back your gains if the market turns against you.

2. Automatic Adjustments

   Trailing stops are managed automatically by Thinkorswim, reducing the need for constant monitoring. This automation helps you stay focused on other trading strategies while the trailing stop works to protect your profits.

3. Flexibility

   With trailing stops, you have the flexibility to set your stop levels based on either dollar amounts or percentages, allowing you to tailor your risk management strategy to your specific needs and trading style.

Common Pitfalls and How to Avoid Them

1. Setting Too Tight of a Trailing Stop

   One common mistake is setting the trailing stop too close to the current market price. While a tight trailing stop can help protect profits, it also increases the risk of being stopped out prematurely due to normal market fluctuations. To avoid this, set your trailing stop at a level that accounts for the asset’s volatility.

2. Ignoring Market Conditions

   Market conditions can greatly influence the effectiveness of trailing stops. In highly volatile markets, prices may swing dramatically, triggering your trailing stop unnecessarily. Consider the overall market environment when setting your trailing stop parameters.

3. Not Adjusting for Volatility

   If you're trading assets with high volatility, you may need to adjust your trailing stop settings to accommodate larger price swings. Failing to do so can result in frequent stop-outs and missed opportunities for greater gains.

Tips for Maximizing Your Use of Trailing Stops

1. Backtest Your Strategy

   Before applying trailing stops to live trades, backtest your strategy using historical data. This can help you determine the most effective trailing stop parameters for different market conditions and asset types.

2. Combine with Other Risk Management Techniques

   Trailing stops are a powerful tool, but they work best when combined with other risk management techniques, such as position sizing and diversification. Use trailing stops in conjunction with these methods to enhance your overall trading strategy.

3. Regularly Review and Adjust

   Regularly review the performance of your trailing stops and adjust them as needed based on changes in market conditions or your trading objectives. This ongoing evaluation will help you maintain an effective risk management strategy.

Conclusion

Mastering the use of trailing stops in Thinkorswim can significantly enhance your trading strategy by allowing you to protect profits and manage risk more effectively. By understanding how to set up and configure trailing stops, recognizing the advantages and potential pitfalls, and following best practices for their use, you can optimize your trading performance and achieve better results.

Whether you're a seasoned trader or just getting started, implementing trailing stops can provide you with greater control over your trades and help you navigate the complexities of the financial markets with confidence.