Trailing Stop Orders

What is a Trailing Stop Order?

A Trailing Stop Loss Order is a Stop Loss Order. The difference between the Trailing Stop Loss Order and a traditional Stop Loss Order is the word “Trailing.”

A Stop Loss Order is when an order is placed to sell a stock and the price to sell is below the current market value of the stock. If the stock is at $20 and you place a Stop Loss Order at $18, once the stock goes down to $18 a market order is placed to sell the stock.

A Trailing Stop Order adjusts the stop (sell) price at a fixed percent or fixed dollar amount below the current market price of a stock.

Understand how a (percentage) Trailing Stop Loss works

The trailing stop loss is a type of sell order that adjusts automatically to the moving value of the stock. Most pertinently, the trailing stop loss order moves with the value of the stock when it rises. For example:

• You purchase a stock at $20 per share.
• You set a Trailing Stop Loss at 20%.
• Stock goes down to $15. Your stock would have been sold at $16. $4 (20%) below the $20 price when you set the Trailing Stop Order.
• From purchase, if the stock goes up to $30 then starts down, the Trailing Stop Order is now re-set to a $24 sell price. $6 (20%) below the new high of $30.

Understanding how a (dollar amount) Trailing Stop Loss works

• You purchase a stock at $20 per share.
• You set a Trailing Stop Loss at $2.
• Stock goes down to $15. Your stock would have been sold at $18. $2 below the $20 price when you set the Trailing Stop Order.
• From purchase, if the stock goes up to $30 then starts down, the Trailing Stop Order is now re-set to a $28 sell price. $2 below the new high of $30.

A Trailing Stop is more flexible than a fixed Stop Loss Order, as it automatically tracks the stock’s price direction and does not have to be manually reset like the traditional Stop Loss. The trailing amount will constantly be reset at the highest stock price after the original setting of the Trailing Stop Order. As the market price rises, the stop price rises by the trail amount, but if the stock price falls, the stop loss price doesn’t change, and a market (sell) order is submitted when the stop price is hit. This technique is designed to allow an investor to specify a limit on the maximum possible loss, without setting a limit on the maximum possible gain.

Once you submit a Trailing Stop Order, it remains in force until it’s triggered by the trailing amount setting, or you manually remove it.

Learn how to use a Trailing Stop Loss Order and the effect this strategy may have on your investing or trading strategy.

 What is a traditional Stop Loss 

 A traditional Stop Loss is an order designed to limit losses automatically. It does not follow or adjust to the stock’s changing price, unlike the Trailing Stop Loss Order.

The traditional stop loss order is placed at a specific price point and does not change. For example:

• You purchase stock for $30.
• You set your traditional Stop Loss Order at $28. In this case, the stock will be sold at $28.
• If the stock price rises to $35 and then dips suddenly, you will still sell at $28. You will not protect the paper profit you made from the stock’s recent rise.

Why should I use a Trailing Stop Order? Advantages

• This order type will sell your stock automatically when share levels drop, giving you peace of mind when you’re away from your trading platform during any significant downward action in price.
• This order does not put a cap on profits. Shares can continue to rise and you will stay invested as long as prices do not dip by your predetermined percentage.
• The Trailing Stop Loss order is flexible. You can enter any Trailing Stop Loss percent for a customized risk management plan and change it as you please.
• There is no cost to placing a Stop Loss Order.
• This order allows investors to take emotions out of their trades and instead stick to predetermined goals.

What are the risks of Trailing Stop Orders? Disadvantages

• There is no guarantee you will receive the price of your Stop Loss Order. If the stock price drops quickly, your order may not get filled at your predetermined stop price. Thus, you may be forced to sell at a lower price than you expected. This is particularly true with illiquid stocks or in fast-moving markets.
• Extremely volatile stocks are difficult to trade with Trailing Stop Loss Orders. If you set an order too low to account for these potential fluctuations, you are liable for significant losses. But if you set the trailing order too high, you may end up unwillingly selling the stock due to normal daily price movements at a time when you might be better off holding onto the stock.
• You lose the ability to make a thoughtful and analytical decision whether to sell the stock after a price drop when you might otherwise deem the drop irrational.
• Trailing stops can only trigger during the regular market session. They’re not able to execute a trade during pre-market or after-market hours. Also, if the market is closed during regular market hours for any reason, trailing stops won’t execute until the market reopens.