How to Use the Trailing Stop Loss Command

The Trailing Stop Loss is a widely used command in the stock market. It allows you to sell your investment if its price falls below a certain threshold. This command helps you make more rational, emotion-free sell decisions, ideal for investors aiming to reduce risk and minimize losses while maximizing potential profits. Since the Trailing Stop Loss is an automated command, you don’t need to monitor stock prices continuously.

Grasp the mechanics of the trailing stop loss command. It’s an automatic sell order that adjusts according to stock price trends. To explain simply, it shifts the sell point automatically as the stock price rises. For example:

• You purchase a stock at $25.
• The stock price rises to $27.
• You set the trailing stop loss to move by $1.
• As the price increases, the stop loss point adjusts downward by $1 from the current price.
• If the stock hits $29 and then drops, the stop loss will be at $28.
• Once the stock reaches $28, the trailing stop loss activates, and you sell the stock. At this point, your profit is secured (assuming there is a buyer).

Understand the traditional stop loss order and how it works. The traditional stop loss is an order placed to automatically limit your losses. Unlike the trailing stop loss, this command doesn’t adjust according to stock price fluctuations.

• The traditional stop loss is set at a specific price point and cannot be changed. For example:
• You buy a stock at $30.
• You set the stop loss at $28. In this case, the stock will be sold at $28.
• If the stock price rises to $35 and then suddenly drops, you will still sell at $28. You won’t retain the profit made during the recent price increase.

Learn how to maximize profit with a trailing stop loss order. Using a trailing stop loss instead of selling at a preset level allows the command to automatically adjust as your investment increases in value.

• For example, if you have a stock worth $15 and set a traditional stop loss at $10, the stop loss remains at $10, even if the stock price rises to $20. If the price drops, you will sell at $10.
• With the trailing stop loss, however, you can set it at 10%. For instance, if the stock price rises to $20, your stop loss will adjust automatically. The sell point will be triggered when the stock hits $18, which is 10% lower than $20. If you were using a traditional stop loss, you would be forced to sell at $10, losing out on the gains made when the stock price increased.

Use an easy, proactive strategy. With a trailing stop loss, you won’t need to manually update your automatic sell conditions. Instead, the trailing stop loss automatically adjusts based on the stock price. Additionally, setting a trailing stop loss is quite simple.

Find out if you can use the trailing stop loss. Not all brokers allow you to use this strategy, and similarly, not all accounts permit trailing stop loss orders. You’ll need to check with your broker to confirm if you are eligible to use this type of order.

• It’s best to ensure that you have the option to use this command.

Track the historical fluctuations of the stock you're investing in. Understanding past price movements and trends can be highly beneficial. This allows you to anticipate when the stock is likely to rise or fall. With this knowledge, you can determine a reasonable price adjustment to balance between triggering an early sell order and missing out on opportunities to profit further.

Choose the right time to place your order. You can place an order at any time, right after purchasing the stock, or you may choose to monitor the stock before making the decision to set the order.

Choose between a fixed price or a relative value. Trailing stop loss orders can be set in two ways: with a fixed price or as a relative percentage.

• For example, you can set the trailing value (trail) as a specific amount (e.g., $10) or a percentage of the stock's value (e.g., 5%). In both cases, this range adjusts over time as the stock price changes.
• If you use a fixed dollar value, you set a limit in dollars for how much the stock can decrease from its highest price before the sell order is triggered. The value must not exceed two decimal places (i.e., no more than two digits after the decimal point).
• If you use a percentage option, you can determine the range that allows the stock to fluctuate within an upward trend. This percentage must be between 1% and 30% of the current price.
• Be aware of the risks. The risk in any stop loss order is that the stock may fall below the sell point and trigger the sale, only to then reverse and increase in value, causing you to miss out on the profits made during the recent price surge.

Set a reasonable trailing value. Consider how much you want to set the trailing stop loss at. Consult with your broker to determine the appropriate value or percentage for the trailing stop loss order.

• If you set the value too narrow, you may trigger an early sell action.
• If you set the value too wide, you may miss the opportunity to capture more profit when the stock starts to decrease.

Decide whether you want the order to be valid for the day or as a GTC (Good 'til Canceled) order. A trailing stop loss can be set either as a day order or a GTC order. Using these two options can help you determine how long the trailing stop loss order will be active.

• A day order is valid only until the end of the current trading session. If you place a day order after the market closes, it will remain valid until the closing of the next session.
• Most GTC orders are valid for 120 days. After 120 days, the order will expire. However, some brokers allow GTC orders to be extended indefinitely.

Choose between a market order and a limit order. A market order is an order to buy or sell an investment at the best available price at the current moment. A limit order lets you set a specific price for buying or selling securities.

• When the stop loss order you’ve triggered hits your sell point, you can complete the transaction using either a market or limit order. This means you'll sell your shares.

A market order is the default order type. This type of order is executed without regard to the price, ensuring the transaction happens immediately at the best price available at the time.

• The trailing stop loss can also be used for position management and options for selling shares.

For stocks with significant price fluctuations, it is advisable to opt for the traditional stop-loss order.