What is a trailing stop in the stock market

A trailing stop loss is a type of stock order. Using this order will trigger a sale of your investment in the event its price drops below a certain level. The trailing stop loss order can help make the decision to sell easier, more rational and less emotional. It is designed for the investor who wishes to minimize risk, helping him or her minimize losses while maximizing potential gains.

How to Use a Trailing Stop Loss: 12 Steps (with Pictures)

Featured Articles Investments and Trading. This version of How to Use a Trailing Stop Loss was reviewed by Michael R. Lewis on January 19, Community Dashboard Random Article About Us Categories Recent Changes. Write an Article Request a New Article Answer a Request More Ideas Understand how a 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. This means that you will sell the stock. At this point, your gains are locked in assuming a buyer can be found. Recognize what a traditional stop loss is. 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. You will not protect the paper profit you made from the stock's recent rise. Understand how the trailing stop loss order helps to maximize your profits. Use a trailing stop loss order instead of selling at a predetermined level. Instead the order automatically adjusts when the price of your investment rises. Use an easy, proactive strategy.

Rather, the trailing order changes automatically depending on the price of the stock. Find out if you can use a trailing stop loss order. Not every broker will allow you to use this strategy. Likewise, not all types of accounts will permit a trailing stop loss order.

Be sure to check if your broker allows this type of transaction. It is highly recommended that you have the option to use this order. Track the historical movement of your stock. It is helpful to understand the historical volatility and price movements of your stock. This will give you an idea of how much the stock moves up or down in a given period of time. Use this to determine a reasonable trail value that balances between triggering a premature sale and leaving too much profit on the table.

Choose when you want to place the order. You can place a trailing stop loss order anytime. You can do this immediately after the initial purchase. You can also track your stock and decide to put in the trailing stop loss order later on. Choose a fixed or relative amount. As noted, a trailing stop loss can be created in one of two ways.

You can either use a fixed price or a relative one based on a percentage. This trail changes over time as the price of the stock changes. By using the fixed-dollar option, you limit to a strict dollar value the amount the stock can go down from its highest point before a sell order is automatically placed.

Dollar amounts cannot have more than two decimal places in other words, no tenths of a cent.

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The risk with any stop loss is that the stock may dip below the sell point and trigger a sale. Then the stock may reverse and go back up, leaving you behind without the newly accrued profit.

Determine a reasonable trail value. If you set the value too tight, you might trigger a sale prematurely. If you set the value too wide, you might leave too much profit on the table if the stock begins to fall.

Specify if you want a day or GTC order. This defines the length of time that the trailing stop loss order will be in effect. If you place the day order when the market is closed, it will remain in effect until the close of the next day of trading.

Thus, the order will be canceled after days. There are some orders that allow for unlimited time on a GTC order. Choose between a market order and a limit order.

A market order is an order to buy or sell the investment at the best current price available. This means that you will sell your stock.

A market order is a default order. It will execute without regard to price. Would I put trailing stop loss order while buying a stock in buy position at the same time, or put it separate later in the "sell" position? Not Helpful 0 Helpful 2. Is there a formula or rule of thumb to apply for TS Percentages for the long- and medium-term investor?

Most traders set their stops based upon long- and medium-term support and resistance levels or a defined percentage that fits their risk tolerance. Theoretically, a stock which breaks support or resistance will fall or rise to a new levels before reversing course.

Not Helpful 12 Helpful Will a Trailing Percentage Stop Loss to sell be established off of the current stock price or the current bid price? Stop orders are executed based upon actual transactions, rather than the bid and offer price. Once the stop is triggered with a transaction, the stop becomes a market order. Not Helpful 10 Helpful 8. Do you place the trailing stop higher or lower than the normal stop loss?

You don't actually set a trailing stop-loss price. Typically, you would place a trailing stop-loss order while a stock's price is rising. The trailing stop-loss would kick in whenever the stock price peaks and then falls back some specified small amount, triggering an automatic sell order.

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This arrangement allows you to lock in gains without the risk of quickly losing them. Not Helpful 0 Helpful 4. Do the trailing stop loss orders continue into extended-hours trading? No type of stop loss protects you after the market closes. Instead of your stock going up for sale at, say, 10 PM when the stock hit your stop loss, it will sell in the morning when the market opens, at whatever price it is then.

Not Helpful 10 Helpful How do I put a trailing stop on a shorted stock?

Place the order above the shorted price, so it will cover the short, and buy back at the higher price specified on the order. Not Helpful 8 Helpful How do I remove the trailing stop so I can sell my stock? You may sell your stock at any time, regardless of any stop-loss order in place.

If you want to cancel your stop-loss order, just tell your broker. How do I raise a trailing stop once I have placed a trailing stop loss? Cancel the existing trailing stop order and replace it with a new trailing stop order at the higher price. Not Helpful 5 Helpful 8. What if my trailing stop is reached after hours, but by opening bell it is back above my trailing stop amount? After-hours trading is irrelevant to stop losses.

Opening-bell prices are all that matter. Not Helpful 2 Helpful 2. Can I have multiple trailing stop loss in a single position in case of slippage? Answer this question Flag as Already answered Not a question Bad question Other. If this question or a similar one is answered twice in this section, please click here to let us know. Tips A trailing stop loss can also be placed on short equity positions and options.

Warnings Choose a traditional stop loss order for highly volatile stocks. Edit Related wikiHows WH. Article Info Featured Article Categories: Featured Articles Investments and Trading In other languages: Thanks to all authors for creating a page that has been read , times. Did this article help you?

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