Here is a simple scenario explaining how to 'lock in' profits in volatile markets by using a Trailing Stop*.
Example: Buying Singapore Blue Chip with a Trailing Stop
Say you buy two Singapore Blue Chip (S$40 mini) contracts at 344.1. Each contract equates to $40 per point movement, so you are exposed to $80 of loss or gain per point. You choose a Trailing Stop distance of 5 points and a Step size of 3 points. The Stop initially sits 5 points behind your opening price, at 339.1.
Immediately the Singapore Blue Chip starts to rise. Very soon our price has risen to 347.1 (3 points above your opening price) and your Stop 'steps' up by 3 points to 342.1 to re-establish a 5-point distance from the new market level.
The rally continues and by lunchtime the Singapore Blue Chip is trading at 353.1. Your Stop has therefore moved automatically four more times and you are now sitting on a healthy potential profit with your Stop waiting 5 points behind at 348.1.
The next morning the Singapore Blue Chip is trading back down at 348.0.
Your Trailing Stop has kicked in and your position is closed 5 points below the recent high at 353.1, still well above your opening price of 344.1.
Your gross profit on the trade is calculated as follows:
Trailing Stop Example
| Closing Level | 348.1 |
| Opening Level | 344.1 |
| Difference | 4 |
Gross profit on trade: 4 x $80 = $320
To determine the net or overall profit on the transaction you also have to take account of the commission you have paid and the interest and dividend adjustments.
With a conventional Stop Order you would still be in the market, looking at a relatively small paper profit.
By contrast with a Trailing Stop you are able, in this scenario, to profit from a volatile market.
*A stop order may not limit your risk in times of rapid market movement. In such cases the market may move through your stop in which case your order will be filled at the best available price.