Trailing Stops

A trailing stop is a type of stop order that moves with the market price of a security. As the price rises or falls in the trader’s favor, the stop price adjusts by a specified percentage or dollar amount. If the price moves against the trader, the trailing stop remains in place and triggers a sell (or buy) order when the price reaches the stop level. Trailing stops are used to lock in profits while protecting against significant losses.

Example

An investor buys a stock at $50 and sets a trailing stop of 5%. As the stock price rises to $60, the stop moves up to $57. If the stock falls back to $57, the trailing stop triggers a sell order, protecting some of the gains.

Key points

• A stop order that adjusts as the market price moves in the trader’s favor.

• Used to lock in profits while limiting potential losses.

• Remains static when the market moves against the trader, triggering when a set level is reached.

Quick Answers to Curious Questions

How do trailing stops help traders manage risk?

Trailing stops lock in profits by adjusting upward with a rising market while limiting losses if the market reverses.

What is the main advantage of using a trailing stop over a regular stop-loss order?

Trailing stops automatically follow favorable price movements, allowing traders to capture more profits compared to static stop-loss orders.

When should a trader use a trailing stop?

A trailing stop is useful in trending markets where a trader wants to maximize gains while having protection in place in case of a reversal.