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Article Series:
Learn Stock Market Trading Tips
What
is a Trailing Stop Order?
In the stock market realm, one way to protect
all your gains from purchased stock and to limit the amount
of losses is to place a trailing stop order which sets
the stop price at a certain amount. If the stock market prices
rise, then so does the stop price, however, if the stock market
prices decrease, the stop price remains the same. This allows
the investor to set a limit on the maximum possible loss he
or she is willing to accept, however, the amount of gain is
limitless.
Pretend that you have just purchased 100 shares of Company
M for $50 per share and you want to lock in the profit but
limit your losses so you set the trailing stop 2 points below.
Much to your surprise, the price of shares from Company M starts
to increase up to $655 during one month. Because you issued
a trailing stop order, the price has adjusted just as it should,
to $653, which is 2 points below $655. Once it hits $653, the
trailing stop order is activated and a market order to sell
100 shares from Company M is placed in order for your broker
to receive the best possible price on Company M's stock. Thus,
this works to protect your initial investment as well as to
ensure that you will gain a profit.
Because
of the way the trailing stop order is set up, you, the
investor, do not have to monitor on a daily basis how a
stock playing out. Therefore, you are able to simply invest
your money by purchasing stock in a company that you feel comfortable
with, place a trailing stop order on it, and then sit back,
stress free allowing the investment to grow. Also to be noted,
the trailing stop order is free to use, so do not allow your
broker to forget to mention it to you and do not forget to
use this investment option because it is there help you. However,
there is not one particular strategy in place in order to keep
a stop price from being activated. It is suggested that if
you have invested in long-term stock options to set your trailing
stop loss at 15% or more, but if have invested in a short term
stock option; you would want to set your trailing stop loss
at around 5%. Another restriction on the trailing stop order
is that you may not use them on certain stocks, such as penny
stocks. The higher the risk on the stock purchase, the less
of a chance you will have to use your trailing stop order.
As a final note, only
use the trailing stop order when you actually own stock
that you feel is about to drop. If a particular
stock is about to drop, this type of order ensures that you
will be able to sell the stock to ensure that you receive a
return in investment. As quickly as the stock market fluctuates,
it is important to utilize this type of order, especially on
stocks that you have bought, but later feel that they will
drop in price when you decide to sell them. For instance, you
bought let's say you bought stock in a restaurant chain that
you felt was going to gain a tremendous amount of profit, however,
at the quarterly review of your portfolio, you and your broker
discover that your restaurant stock has only gained 2% in four
months. This is an extremely lower than the estimated 25% gain
that was predicted for this stock. When you bought the stock,
you placed a trailing stock order on it in order to prevent
your rate of return from dropping. Therefore, you make the
decision to sell the stock because, after the consultation
with you broker, you feel that the stock is not going to increase
any time soon. By placing the trailing stop order on your restaurant
stock, you basically ensured that a high rate of return was
“locked in” so that you would not lose very much money when
purchasing the stock.
Trailing stop orders tend to be a little confusing, however,
just know that by placing them on all the stock that you possibly
can ensures that you will receive a high rate of return. It's
like an insurance policy on your purchased stocks. # # # # # SolveYourProblem.com : 2007
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