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.
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.
Once placed, the order will adjust in price based on your settings that you set upon initiation of the trade.
Some possible settings to use include:
An example would be the following:
Possible scenarios:
A Trailing Stop "Loss" order set in percentages works the same way, except in percentages instead of dollars.
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.
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.
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.
Conclusion:
Before deciding to use this type of order, be aware that "Trailing Stop" orders don't work during Pre-market or Aftermarket trading hours.
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.
Larry Both has been trading stocks online since 1997. I started trading before the "tech bubble" and have been trading stocks ever since. Trading and following the markets through the tech bubble, the housing bubble and the following financial system crisis has allowed me to experience a wide variety of scenarios. I have always enjoyed helping other people in any way that I can, so starting and running my website is a way for me to do just that. I invite you to visit my website and take a look around.