Using A Trailing Stop Order To Help Manage Risk

A Trailing Stop order is an order you place when trading stocks that can help minimize losses and protect potential profits. It is a key component that is available to help manage risk when involved with online stock trading.

nn

Using this type of order will also help keep emotions out of your trading decisions. Emotions can often allow a profitable trade to turn into a loss, and a losing trade to wind up becoming a bigger losing trade.

nn

Once placed, the order will adjust in price based on your settings that you set upon initiation of the trade.

nn

Some possible settings to use include:

nn

n
• Trailing Stop Loss in dollars
n
• Trailing Stop Loss in a percentage
n
• Trailing Stop Limit in dollars
n
• Trailing Stop Limit in a percentage
n

n

An example would be the following:

nn

n
1. You place an order to buy shares of "xyz" stock and are filled at a price of $10.00 per share.
n
2. You place a "Trailing Stop Loss" order in dollars, with a trailing amount of $1.00
n

n

Possible scenarios:

nn

n
1. If the price of the stock goes to $9.00 or below, the order will get triggered and turn into a market sell order and be sold at the best available price in the market.
n
2. If the price of the stock goes up to $10.50, the order will move up and adjust as the price of the stock rises above $10.00. In this case, the order is now at $9.50 because it will trail (follow) the stock price as it moves up by the amount you set in dollars when you placed the trade, in this case $1.00.
n
3. If the price of the stock goes up to $15.00, the order would follow up to $14.00. If the price of the stock now drops to $14.00, the order would stay at $14.00 and would trigger and become a market sell order at $14.00. The Stop Loss order does not adjust downwards in this case.
n

n

A Trailing Stop "Loss" order set in percentages works the same way, except in percentages instead of dollars.

nn

A Trailing Stop "Limit" order works the same way as a Stop "Loss" order except that once the order is triggered, it becomes a "Limit order" at a price that you specify instead of a market order.

nn

There are "Trailing Stop" orders to help manage risk when buying stocks (going long), as well as when shorting stocks. When protecting your positions when buying stocks, they are sometimes called "Sell Trailing Stop" orders, and when helping protect any short positions you have, they are sometimes called "Buy Trailing Stop" orders.

nn

The "Buy Trailing Stop" order works the opposite of what I explained above. In other words, the price of the "Stop" order will trail the stock price down, instead of up.

nn

Conclusion:

nn

Before deciding to use this type of order, be aware that "Trailing Stop" orders don't work during Pre-market or Aftermarket trading hours.

nn

Trailing Stop orders are just one of the tools that are available when trading stocks that can help minimize risk and protect potential profits. There are other methods and tools available that you can use to help when developing a complete trading plan.

n