How to Set a Trailing Stop Loss Order
Learn to implement trailing stop loss orders to dynamically protect trading gains and minimize potential losses. Enhance your risk management.
A trailing stop loss order is a dynamic tool for managing investment risk and securing potential gains. It protects profits or limits losses by automatically adjusting the stop price as a security’s value moves favorably. This order allows participation in upward price movements while creating a safety net against sudden market reversals.
Understanding Trailing Stop Loss
A trailing stop loss sets a stop price at a predetermined distance from a security’s current market price. This distance can be a fixed percentage or a specific dollar amount. As the security’s price increases for a long position, the trailing stop price moves upward with it, maintaining the set distance. This adjustment locks in more profits as the asset’s value appreciates.
A trailing stop’s unique characteristic is its one-way movement. If the market price declines, the trailing stop price remains fixed at its last adjusted level. The order triggers and converts into a market order only if the price falls to this stationary stop level. This mechanism protects gains, preventing a profitable trade from becoming a significant loss if the market reverses.
Determining Your Trailing Amount
Choosing the appropriate trailing amount, percentage or fixed dollar value, requires careful consideration. A common approach sets the trailing stop as a percentage of the security’s price, typically 10% to 25%. This percentage-based method automatically adjusts the point spread between the market price and the trigger price as the security’s value changes. Alternatively, a fixed dollar amount ensures the stop remains a set monetary value below the highest price reached.
Asset volatility significantly influences this decision; more volatile securities may need a wider trailing stop to avoid premature exits from normal price fluctuations. Tools like the Average True Range (ATR) can help measure volatility, suggesting a stop distance based on typical price movements. Your personal risk tolerance and the timeframe of your trade also influence the choice; shorter-term trades might use tighter stops compared to longer-term investments. Regularly reviewing and adjusting this amount based on current market conditions maintains effectiveness.
Executing a Trailing Stop Order
Placing a trailing stop order on an online trading platform involves specific steps. First, select the security and choose the “sell” action for a long position. Then, specify the quantity of shares for the order.
Next, select “Trailing Stop” as the order type. Input the determined trailing amount, either a dollar value or a percentage. Most platforms require selecting a “Time in Force” option, such as “Day” (expires at market close) or “Good ‘Til Canceled” (GTC), which keeps the order active for up to 180 days. After reviewing details on a confirmation screen, submit the order. Remember that trailing stop orders convert to market orders once triggered; the final execution price may vary, especially in rapidly moving or less liquid markets. These orders typically trigger only during standard market hours, not pre-market or after-hours sessions.