Trailing stop orders are a type of conditional order, where the sale of a security is sold only after a specified condition has been met. These types of orders are especially useful when you want to minimize losses, while letting profits run.
While this tool can be extremely useful, many investors fail to use it. Understanding and using trailing stop orders correctly can help lock in profits, as the stop order is adjusted as the price fluctuates. These types of orders are excellent for long-term trading strategies.
While trailing stop orders can be effective tools to mitigate risk and realize profits, they are also crucial in eliminating perhaps the biggest road-block most investors face – emotional trading. By formulating, implementing, and sticking to a preset trading plan, you can better position yourself for larger gains and smaller losses.
How To Use Trailing Stop Orders
Trailing stop orders can be placed using a variety of criteria and settings. You can choose to set your trailing stop price as either a percentage of the security’s present market value, or a spread in points. Once the criteria for the order has been met, a market order is executed.
Once you have decided your ideal entry point for purchasing a security, and have purchased the desired stock, you may then place a trailing stop order for either a specified dollar amount, or a percentage of the securities market value.
For example, if you were to purchase shares in company XYZ at $20.00 and immediately place a trailing stop order to sell the stock with a $2.00 trailing stop, this sets the stop price at $18.00. If after the order is placed XYZ fails to rise above $20.00 but also doesn’t fall to $18.00 the trailing stop order will not be executed.
If the security rises is price, the trailing stop order resets to the current market price. When XYZ rises to $24.00, the new stop loss is rest to $22.00, locking in the $2.00 per-share profit. You may also choose to utilize a trailing stop limit order, which helps lock in your desired price.
How Trailing Stop Orders Mitigate Risk In Your Portfolio
When you utilize trailing stop orders in your portfolio, you are eliminating the possibility of making investment decisions based on emotions. By automating your trading plan as much as possible, you virtually eliminate the possibility that a trade could be made out of greed (bad) or fear (worse).
Trailing stop orders not only lock in profits, but can protect yourself from massive swings in a stock’s price either through market volatility, economic conditions, or corporate scandal. These types of orders also give you peace of mind that your investments are protected automatically, and you do not have to sit in front of your computer all day watching stock prices.
These types of orders are just one way to mitigate loss, and realize profits in your investments. When used as part of a trading plan, trailing stop orders can be one of the easiest and most effective tools in and most effective tools in an investor’s arsenal.