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This article was co-written by Michael R. Lewis. Michael R. Lewis is a retired Texas executive, entrepreneur and investment advisor. He has over 40 years of experience in Business & Finance, including the position of Vice President of Blue Cross Blue Shield of Texas. He holds a BBA in Industrial Management from the University of Texas at Austin.
There are 9 references cited in this article that you can view at the bottom of the page.
This article has been viewed 11,141 times.
Trailing Stop Loss is a commonly used order in securities. This order allows you to sell your investment when its price falls below a certain level. Stop loss orders can help you make selling decisions easier, more rational, and less dependent on emotions. This is an order designed for investors who want to minimize risk, helping to minimize losses while maximizing potential gains. [1] X Research Source Stop-loss orders are automatic, so you don’t need to constantly check the stock price.
Steps
Understanding Stop Loss Orders
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Understand how trailing stops work. This is a type of automatic sell order that is adjusted according to the movement of the stock price. To make it easier to understand, this order will move the selling point automatically according to the stock’s value when the stock goes up. Example: [2] X Research Source
- You buy the stock for $25.
- The stock rose to $27.
- You place a lower stop loss with a move value of 1 USD.
- While the price moves up, the stop loss will automatically move 1 USD lower than the current price.
- When the stock price reached $29 and then started to fall. Then the stop loss is 28 USD.
- After the stock price hits $28, the trailing stop loss order will take effect. That is, you will sell the stock. At this point, your profit is preserved (assuming there are buyers).
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Understand what a traditional stop loss is like. A traditional stop loss order is an order placed to automatically limit losses. This order will not be able to move or adjust to the movement of the stock price, which is different from the trailing stop loss order.
- Traditional stop loss orders are placed at a specific price point and cannot be changed. For example:
- You buy stock for $30.
- You place a traditional stop loss at 28 USD. In this case, the stock will sell for $28.
- If the stock price goes up to $35 and then suddenly plummets, you’d still sell at $28. You won’t keep the gains made during the stock’s recent rally.
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Learn how to maximize profits with a trailing stop loss. Use a stop loss order instead of selling at a predetermined level. The trailing stop loss order will adjust itself when the investment price increases.
- For example, if you have $15 worth of stock. You set the sell level at 10 USD, with the traditional stop loss, this automatic stop loss point remains unchanged. If your stock price goes up to $20, your stop loss is still $10. If the stock price drops, you will still sell for $10.
- But with a stop loss order below will be different, for example you also have a stock priced at 15 USD. You can place a stop loss below 10% instead of placing a traditional stop loss at $13.50. If the stock price goes up to $20, you’ll still use 10%. So your sell order will take effect when this stock falls to 18 USD (10% lower than the 20 USD threshold). If you use a traditional stop loss, you should always sell the stock when it drops to $13.50, and you lose the profit you made when the stock goes up.
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Use easy strategies, and be proactive. With a trailing stop loss, you won’t need to manually change the semi-automatic conditions. Instead, the trailing stop loss will automatically change depending on the stock price. [3] X Research Source Furthermore, placing a trailing stop loss is quite easy.
Place a stop loss below
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Find out if you can use a trailing stop loss. Not all brokers allow you to use this strategy. Likewise, not all accounts allow a trailing stop loss. You must check with your broker whether you are allowed to use this type of trading.
- You better have the option to use this command.
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Keep track of the history of the stock you’re investing in. Understanding past movements and trends in stock price movements is a very helpful step. Thanks to this step you can know when the stock will go up or down. Then use this knowledge to determine a fair move value to strike a balance between triggering an early sell order and missing an opportunity to make more profits. [4] X Research Sources
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Choose when to place an order. You can place an order at any time, right after the purchase. You can also monitor the stock before deciding to place an order.
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Choose a fixed or relative price. As noted, trailing stops can be created in two ways. You can use a flat rate or a percentage rate. [5] X Research Sources
- For example, you can define a move value (trail) as a certain value (e.g. 10 USD) or a percentage of the value of a security (e.g. 5%). In both cases, this range of movement is related to the stock value. This score will automatically change over time as the stock price changes.
- Using a dollar-denominated option, you limit a certain dollar amount to allow your stock to drop from its peak before the sell order is automatically triggered. This value cannot have more than two decimal places (i.e. no more than two digits after the “,” in the decimal system.) [6] X Research Source
- Using the percentage option, you can determine the appropriate range for the stock to move up and down during an uptrend. This ratio should be in the range of 1% to 30% of the current price. [7] X Research Sources
- Be aware of the risks. The risk in any stop loss order is that the stock could fall below the sell point and trigger selling. The stock can then reverse and go up again, so you lose out on the stock’s new advance.
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Determine a reasonable displacement value. Consider how much you want to place your trailing stop loss order. [8] X Research Source Talk to your broker to determine the appropriate value or percentage for a trailing stop loss.
- If you set the value too narrowly, you can trigger an early sale.
- If the value is too broad, you may miss the opportunity to make a lot of profit when the stock starts to fall.
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Specify whether you want the order to be valid for the day or the GTC order. A trailing stop loss can be placed as an order valid for the day or valid until canceled – GTC (Good ’til Canceled). Using these two orders can help you determine when a trailing stop loss order takes effect.
- An order valid for the day is an order valid until the end of the current trading session. If you place an order valid for the day when the market closes, it will remain valid until the next session’s closing time. [9] X Research Source
- Most GTC orders are valid for 120 days. As such, this order will be canceled after 120 days. However, there are still some orders that allow an indefinite extension of GTC orders.
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Option to hold market orders and limit orders. A market order is an order to buy or sell an investment at the best price available at the moment. [10] X Research Source Limit orders allow you to set up buying or selling securities at a certain price.
- Once you reach the sell point where you have activated your trailing stop loss, you can then complete a market or limit order. This means that you will sell your stock.
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The market order is the default order. This order will be executed without price.
Advice
- A trailing stop loss order can also be used for positions and options to sell stocks.
Warning
- For stocks with strong volatility, a traditional stop-loss order should be chosen. [11] X Research Source
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This article was co-written by Michael R. Lewis. Michael R. Lewis is a retired Texas executive, entrepreneur and investment advisor. He has over 40 years of experience in Business & Finance, including the position of Vice President of Blue Cross Blue Shield of Texas. He holds a BBA in Industrial Management from the University of Texas at Austin.
There are 9 references cited in this article that you can view at the bottom of the page.
This article has been viewed 11,141 times.
Trailing Stop Loss is a commonly used order in securities. This order allows you to sell your investment when its price falls below a certain level. Stop loss orders can help you make selling decisions easier, more rational, and less dependent on emotions. This is an order designed for investors who want to minimize risk, helping to minimize losses while maximizing potential gains. [1] X Research Source Stop-loss orders are automatic, so you don’t need to constantly check the stock price.
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