If a stop loss order stands at $100, but a major development causes the stock to suddenly drop from $110 to $95, the position might be closed at $95 or lower, despite the stop loss level. When you placed the trailing stop, with the XYZ price at $48, and there is a fall to $47.04, it would have seen the sell order executed. You think MEOW will rise in value, but want to help protect yourself in case it falls in value. If you set your trail to 5%, your stop price will always remain 5% below MEOW’s highest price. Trailing Stop Buy needs a better example explained and also an example and not reuse the trailing stop sell example.
- Many online brokers provide this service at no additional cost.
- Here we explain trailing stop orders, consider why, when, and how they might be used, and discuss their potential risks.
- As the market price troughs, the sell stop price dips one-to-one with the market but always at the interval set initially by the trailing percentage amount.
- But if the asset price continues to rise, so does the sell limit price.
Trailing stops may be used with stock, options, and futures exchanges that support traditional stop-loss orders. The goal of a trailing stop limit order, and stop limit orders in general, is to ensure traders don’t sell below a price they are comfortable with if the stock price falls suddenly. If a sell trade is not possible at or above the stop limit price, the trade will not be executed. Options involve risk and are not suitable for all investors.
Example 1. Trailing Stop Buy
A trailing stop limit order is designed to allow an investor to specify a limit on the maximum possible loss, without setting a limit on the maximum possible gain. The limit order price is also continually recalculated based on the limit offset. A “Buy” trailing stop limit order is the mirror image of a sell trailing stop limit, and is generally used in falling markets. A sell trailing stop order sets the stop price at a fixed amount below the market price with an attached “trailing” amount.
- Trailing stop orders are the modification of stop orders which are brilliantly designed for mitigating the trader’s losses and protecting their gains.
- Trailing Stop Buy needs a better example explained and also an example and not reuse the trailing stop sell example.
- The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.
At a price of $200, the trailing stop will only trigger a sale if the asset price drops below $180. With a buy trailing stop order, the stop price follows, or trails, the lowest price of a stock by a trail that you set. If the stock rises above its lowest price by the trail or more, it triggers a buy market order and is executed at the best price currently available.
What Is a Trailing Stock Loss?
The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. It is better to show simple graphics/picture of what happens for every type of trade. However, there are a plethora of articles on google explaining trailing order great details. So, this article is written with the assumption that one knows how trailing order work. We only tried to explain how to place a trailing stop order.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Order Type In Depth – Trailing Stop Limit Sell Order
But if the price only falls to $49.20, your trailing stop order won’t be executed. If the asset price then moves up to, say $51, the trailing stop is then adjusted to $49.98. Keep in mind, other fees such as trading (non-commission) fees, Gold subscription fees, wire transfer fees, and paper statement fees may apply to your brokerage account. When an investor is long a stock, a trailing stop loss reflects a sell order. When an investor holds a short position and expects a stock to fall, a trailing stop loss reflects a buy order. A trailing stock loss is an order that executes when the price of a security moves a percentage or dollar amount in a specified direction.
But, if the asset price falls to $49, from a high of $50, then your XYZ assets will be sold at $49. Firstly, if the stock moves against the trader, the trailing stop will trigger when ETH hits $80, protecting him from further losses. But if the stock price moves up to $200, the trigger price for trailing stop comes along with it.
How Does a Trailing Stop Work?
A trailing stop loss order is guaranteed to be executed if the security price reaches the stop loss level, even if the stock price rapidly declines even lower. A stop limit order is not executed if the price quickly falls below the stop limit level. A trailing stop loss is a type of order that enables the trader to set a maximum dollar amount or percentage drop from the high point of a running position. The order is designed to capture a higher exit price on a position (a long position) every time the price ticks higher. If the price moves in your favor, the ‘trailing’ aspect pushes the stop order higher. Once the security price does fall by the maximum $ or % specified, the position gets stopped-out.
A stop loss that is too tight will usually result in a losing trade, albeit a small one. To do this, first create a SELL order, then click select TRAIL LIMIT in the Type field and enter 0.20 in the Trailing Amt field. In a trailing stop limit order, you specify a stop price and either a limit price or a limit offset. In this example, we are going to set the limit offset; the limit price is then calculated as Stop Price – Limit Offset. You enter a stop price of 61.70 and a limit offset of 0.10.
The trailing amount, designated in either points or percentages, then follows (or “trails”) a stock’s price as it moves up (for sell orders) or down (for buy orders). As soon as you submit your order, the price of XYZ starts to rise and hits $62.66. The trailing stop price has adjusted accordingly and is at $62.46, or $62.66 – the $0.20 trailing amount. By looking at prior advances in the stock you see that the price will often experience a pullback of 5% to 8% before moving higher again. These prior movements can help establish the percentage level to use for a trailing stop.