What Exactly is a Trailing Stop Loss Order?
If you’re new in the trading business, you may have come across the term trailing stop loss order. If you’re not familiar with its meaning, don’t feel bad because there are plenty of other people who dabble in trading that don’t know what it means either. It is, however, something that you need to know because a trailing stop-loss loss order is something that can help you as an investor to make your ventures far more profitable. Here’s everything that you need to know about it and how it can help you improve your odds of achieving financial success in this type of business venture.
What is a trailing stop loss order?
In trading, trailing stop loss is a special kind of trade order that does not set the stop loss price at a specific dollar amount. Alternatively, it uses a percentage or in some cases, a dollar amount that is valued below the market price. A trailing stop-loss order is often shorted to a trailing stop so when you hear the term, either way, you’ll know what it means.
How does a trailing stop loss order work?
Let’s say that you’re trading on the market and you’ve invested in a particular stock. You’ve set the order in place for a trailing stop loss. When the price of the stock rises, the trailing stop loss is taken along with it. If the price of the stock stops rising, the stop-loss price stays at the level the stock reached when it stopped going up. Placing this order will protect your investment from a downswing by locking in the upside automatically.
Other benefits of a trailing stop loss order
In addition to providing a measure of protection from downsides of a stock, the trailing stop loss order gives you greater peace of mind and a little more freedom. Without the order in place, a wise investor will continually monitor the trends and movements in the stock and the market. This order allows you to set the parameters on what kind of a loss that you’ll be willing to take and in addition, lets you take advantage of any rises in the stock. It sells the stock if it dips below a certain percentage value of the market price.
What’s really sweet about this order is that the trailing stop order rides alongside the stock when it rises. This puts you in a good position for making a profit because it’s a passive rider with will lock in the trigger and it will not sell unless the stock dips below the parameters that you’ve set. If there are ups and downs in the market at any given time, and you won’t have to worry about a premature sell or losing a substantial value either.
Why it’s a good idea
A trailing stop loss is an excellent tool for investors who do not have time to monitor their stock frequently and it offers an automatic protection from falls in stock value without preventing you from allowing your stock to go through the normal cycles of ups and downs before it rallies and jumps again. Since the trailing stop loss is dragged to new levels along with a rising stock, it will reset to the new highs, preventing a significant loss unless you set the order at a higher percentage level.
Tips for successfully using the trailing stop loss order
This order may have a few drawbacks if you attach it to a stock that is volatile. This may result in a series of triggers. You don’t want to get caught up in the habit of frequent trading because of an order that causes a series of triggers. There may be some wash sales tax implications when a stock is sold in less than 30 days of acquisition. Any profits that you make may also be eaten up with commissions and fees for several transactions. The term that is used to describe excessive trading is known as churning and it’s not healthy behavior when trying to build a stable portfolio. Consider the percentage of loss that you are willing to take care before placing a trailing stop loss order. Some investors refuse to use this tool, but others gain peace of mind by knowing that it’s in place.