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.