Trailing Stop Loss Orders, What Are They And How to Use ThemTrailing stop loss orders can be a fantastic tool for traders. It is a great way to keep your loses short while at the same time letting your winners ride. What is a Trailing Stop What is a trailing stop? Simply put a trailing stop is a stop order that follows the stock up but does not come down if the stock goes down. For instance say Tom is a trader and he liked stock XYZ. The stock is trending up and chances are it will keep going up. He decided to buy the stock at $50 and then place a 10% trailing stop on it. So the stop is originally sitting at $45. Over the next couple of weeks the stock goes up to $70, the trailing stop is now at $63 so if the stock pulls back to $63 Tom will automatically exit the position. Because of the trailing stop there is no need to monitor the position, instead tom will just let it sit and get out whenever the stop activates. Eventually the stock reaches a high of $80 making the stop around $72. After that the stock takes a major crash and falls back down to $50. If he had just held the stock without stop loss orders on it he would have broken even after the crash. But because Tom had a 10% trailing stop loss he got out at $72 for a 44% profit. Why and How to Use Trailing Stops Having some sort of stop loss can really help you lessen the impact of horrific market crashes. It just makes sense to put yourself in a position where your risk is limited, yet your potential profit is not, and that is really what stop losses do. Take for example this recent pullback in the market. If you would have held the SPY over the last few months you would have seen your investments increase many times over.
However if you would have held onto it without a trailing stop you would have gotten crushed as the stock started to pull back. Either way it would not have been a pleasant month, but at least with the use of stop loss orders you are able to limit your losses and keep a good chunk of your profits.
Trading using trailing stops is an advanced strategy, but if you have a plan to use it they can allow you to lessen the downside while not limiting the upside. Placing a Trailing Stop Now that you know what it is the next question is how to actual place it. Each broker works a little differently, but if you have a trading account you should have an option to use trailing stops in it. Most brokers will let you type in the symbol that you want to place the order on and then enter how far behind you want the order to trail. You can have the stock trail behind a dollar amount or a percentage amount. Once you place it make sure that it is a GTC (good till canceled order) and not a day order. This way you do not have to reset it every day and you will not even have to think about it again until you exit the position. If you are confused on exactly how to go about placing a trailing stop loss with your account call your broker so that they can guide you through the process. Go From Trailing Stop Loss Orders to Stock Orders
|
