How to Properly Place a Trailing Stop Order

A trailing stop order is a specialized instruction given to a brokerage that helps manage risk and protect profits in investment positions. This order automatically adjusts its trigger price as the market price of an asset moves favorably. Its main purpose is to allow investors to participate in an asset’s upward movement while safeguarding against significant losses if the price reverses.

Understanding Trailing Stop Order Mechanics

A trailing stop order operates by setting a stop price at a specific distance below the current market price for a long position, or above the current market price for a short position. Unlike a fixed stop order, which remains at a static price point, the trailing stop price automatically moves up (for a long position) or down (for a short position) if the asset’s price improves. This dynamic adjustment allows an investor to secure gains as the price increases without constantly manually updating the stop price.

For example, if an asset’s price rises, the trailing stop price will also rise, maintaining the predefined distance from the new high. However, if the asset’s price declines, the trailing stop price remains fixed at its highest attained level. The order is triggered and becomes a market or limit order only if the asset’s price falls to or below this fixed trailing stop price, aiming to execute the trade and limit potential losses or protect accumulated gains.

Investors define the “trailing” amount in two common ways: as a fixed dollar amount or as a percentage. A fixed dollar amount, such as $1.00, means the stop price will always be $1.00 below the asset’s highest price reached. Alternatively, a percentage, such as 5%, means the stop price will be 5% below the highest price. A percentage can adapt better to varying asset prices, while a fixed dollar amount provides a more predictable risk exposure.

Defining Your Trailing Stop Order Parameters

Before placing a trailing stop order, investors must make several important decisions regarding its parameters. First, identify the specific asset to be traded and the exact quantity of shares or units. This information is necessary for the brokerage system.

Determining the trailing amount, whether a fixed dollar value or a percentage, is a significant decision. This choice should consider the asset’s typical volatility and the investor’s individual risk tolerance. For instance, highly volatile assets might require a larger trailing percentage to avoid premature triggering due to normal price fluctuations, while less volatile assets could use a smaller percentage.

Another crucial parameter is the stop order type the trailing stop will convert into once triggered: either a “stop market” or a “stop limit” order. A stop market order, once triggered, converts into a market order and aims to execute immediately at the best available price, offering high execution certainty but no price guarantee. Conversely, a stop limit order, upon being triggered, becomes a limit order that will only execute at a specified price or better, providing price control but no guarantee of execution if the market moves unfavorably past the limit.

Finally, investors must set the “Time in Force” (TIF) for the order, which dictates how long the order remains active. Common TIF options include “Day,” meaning the order will expire at the end of the trading day if not executed, and “Good ‘Til Canceled” (GTC), which keeps the order active until it is either filled or manually canceled by the investor. Selecting the appropriate TIF ensures the order behaves as intended over the desired timeframe.

Executing a Trailing Stop Order

Once an investor has determined all necessary parameters, placing a trailing stop order through a brokerage platform is generally straightforward. Begin by navigating to the order entry screen within the online trading interface, often accessible directly from the asset’s quote page or an account’s portfolio view.

Select “trailing stop” as the order type. After choosing this option, the system will prompt the user to input the predefined details.

This includes entering the asset’s ticker symbol and the precise quantity of shares or units. The investor then specifies the trailing amount, whether a fixed dollar value or a percentage. Following this, the chosen stop order type, either “market” or “limit,” needs to be selected, along with any associated limit price if a stop limit order is chosen.

Finally, input the desired “Time in Force” setting, such as “Day” or “Good ‘Til Canceled.” Before submission, review all entered order details to ensure accuracy. Once confirmed, the order can be submitted, and it will then await execution based on market conditions.

Monitoring and Adjusting Trailing Stop Orders

After a trailing stop order has been placed, monitoring its status is an ongoing responsibility. Brokerage platforms typically provide an “open orders” or “pending orders” section where all active orders, including trailing stops, can be viewed. This section allows investors to see the current status of their orders and observe how the trailing stop price adjusts in real-time as the asset’s market price fluctuates favorably.

The automatic adjustment of the trailing stop price is a continuous process as long as the asset’s price continues to move in the desired direction. For a long position, the trailing stop price will rise whenever the asset reaches a new high. The order remains active until the asset’s price declines to the specific trailing stop price, at which point the order is triggered and sent to the market for execution.

Investors retain the flexibility to modify an active trailing stop order if market conditions or their investment strategy changes. This modification might involve adjusting the trailing amount, converting the order to a fixed stop order, or changing the “Time in Force” setting. Most brokerage platforms offer an “edit” or “modify” option next to the open order, allowing for these changes.

Similarly, if an investor decides that the trailing stop order is no longer necessary, it can be canceled at any time before it is triggered and executed. The cancellation process is typically found in the same “open orders” section, usually with a “cancel” button adjacent to the order details. This allows investors to maintain full control over their positions and risk management strategies.