When using a trading strategy that includes trailing stop orders to help mitigate risk, it is helpful to review a trailing stop order example to see how this valuable tool is best used in your portfolio. A trailing stop order uses one order entry to lock in potential profits, and minimize possible losses.
There are a couple of options for setting a trailing stop order, and what you choose to utilize will depend on your investment goals, risk-tolerance and available capital. No matter what type of investor you may be, it is wise to learn how to use this highly effective tool.
By automating the trading process, trailing stop orders also serve to eliminate the toll that emotional trading can have on your finances. Making investment decisions based on greed and/or fear is a recipe for certain investing failure, and possible massive financial losses.
Trailing Stop Order Example: Dollar Amounts
Trailing stop orders can be set in dollars or cents, and it is important to find the trailing stop order example that best fits your investment objective, and risk-capitol available to you. Your settings will be based on your personal preferences, and what you feel the most comfortable with.
When you set your trailing stop order for a specified dollar amount, your order will reset with each movement in the stock price. If you have set your trailing stop order for $1.00, the security will be sold when the price falls by more than $1.00 lower than its current market price.
In this trailing stop order example, if the security falls by $.99 the order will not be executed. When the conditions of the trailing stop order have been met, a market order will be placed to sell the selected security.
Trailing Stop Order Example: Percentages
A trailing stop order can also be set as a percentage of a security’s price. This trailing stop order example uses a percent decline in a security’s market price as a trigger to sell the selected security. Your unique trading plan will dictate what settings you will use for this type of trailing stop.
If you set your trailing stop order for a specified percent of a security’s current market value, if the stock price falls below your preset parameters, a market order to sell your position will be placed. This helps you effectively lock in gains, while preventing loss to your investments.
In both the trailing stop order example utilizing dollar amounts, as well as the example that uses percentages, the trailing stop order follows the stock prices either up or down, and automatically resets according to current market value.
This automation of your investment strategy can eliminate emotional decisions when investing, and can allow for a longer and more profitable trading career. This option also frees you from watching your portfolio constantly, as your trades will be executed automatically, and according to your preset trading strategy.
Trailing Stop Order Example: Avoid This Common Mistake
It is important to remember that the main difference between a regular stop-loss order and a trailing stop is that the conditions of the sale adjust with the price of the security. Keep in mind when using trailing stop orders the normal trading range of a given security so as not to set your trailing stop too close to the stock’s current price.
As always, there is no real substitute for market research and due diligence, and trailing stops should not be your only way of exiting a trade. There are many things to consider when selling a security including market dynamics, the current economic climate, and your unique investment goals.