Using Trailing Stops
Trailing stops can be very useful when you are trading in the stock market. They can be use to follow stocks up which can help let winners ride and cut losses short.
When you place a trailing stop order what you are actually doing is opening up an order to follow a stock up (or down). For example you buy a $75 stock that you expect is going to make a big move in the near term. You can buy it at $60 and set a trailing stop 5% below the price of the stock.
As the stock goes up so will the stop because the stop is always 5% under the price of the stock. So if the stock goes up to $100 the stop would now be at $95. However the stop will never retrace if the stock pulls back.
This allows you to enter a trade which will follow the stock up until the stock starts to pullback. The stop will get you out once the stock pulls back 5% from its high.
If you do not want to get out of a stock with so early you can always change the stop percentage. If you have a longer term perspective you may want to place the trailing stop at 10% or more below the price of the stock. If you have a shorter time frame you may want to place the stop under 5%, (but remember the less breathing room you give the stock the more often you will get stopped out).
Using trailing stops can be so helpful if you have a problem exiting a trade at the right time. It helps to set in a given game plan. Instead of wondering when to exit a trade you can simply let the stop tell you.
This stop order is not the ultimate answer to all of trading but it should be accompanied by other research but it can definitely be a helpful tool.
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