Trailing Stop
Candlefocus EditorHow a Trailing Stop Works A trailing stop is placed with your broker in order to enter or exit a certain position. When the position reaches the specified stopping point, the order is triggered to either buy or sell. For example, if you buy a stock at $10.00 per share and set a trailing stop loss at 10%, any time the stock drops below $9.00, the order will be triggered and the stock will be sold.
Trailing stops are a helpful tool for investors who want the potential of a large payoff but are also looking to limit their downside risk. By using a trailing stop, investors can take advantage of price changes without constantly monitoring the stock. In addition, the trailing stop will move along with the stock, providing more flexibility and security.
Types of Trailing Stop Orders When making a trailing stop order, there are two options available: percentage or fixed-dollar amount. Each has its own benefits and drawbacks, and it is important to understand which type is best suited to your particular situation.
The percentage-based trailing stop order determines the stop by a specific percentage of the current stock price. For example, if the stock is currently trading at $20 and the trailing stop is set at 10%, the stop will be triggered once the stock falls to $18.
A fixed-dollar amount trailing stop sets a specific amount that the stocks price must move before the stop is triggered. For example, if the stock is currently trading at $20 and the stop is set for $1, the order will be triggered once the stock falls to $19.
Advantages and Disadvantages of a Trailing Stop As with all trading strategies, there are pros and cons to using a trailing stop order. The main advantage of a trailing stop is that it allows investors to take advantage of market movements without constantly monitoring the stock. The downside is that the order type is not delta neutral, meaning that it may be triggered by even a slight dip in the stock's price. Additionally, if the stock experiences a quick, large drop in price, a trailing stop may not be triggered quickly enough to prevent substantial losses.
Overall, a trailing stop can be an effective tool for investors and traders who wish to limit losses and maximize gains. It can be helpful for those who want the potential for a large payoff and are willing to take on the risk of market fluctuations. However, as with any trading strategy, it is important to understand the risks and rewards associated with using a trailing stop order.