What Is a Trailing-Stop Loss Order?
A trailing stop-loss order is a type of trade stop order that manages risk and offers profit protection. It is an exit strategy that adjusts the stop price of a stock by a certain percentage below the market price.
Let’s have a look at an example. When you put a trailing stop of 7% on your investment, it indicates that if the stock price decreased by 7%, your stock would be sold automatically. It offers the trader profit protection which assures the investor to not losing more than 7% of your investments.
A stop-loss order is a trade order given to a broker to buy or sell a stock when it reaches a specific price. It helps investors limit their losses and lock in profits in which a pre-determined exit price is fixed.
A trailing-stop-loss differs in that it is a percentage that moves like the stock price moves. As the stock’s price moves up, the trailing-stop per cent moves along with it. But when the stock price begins to decline after it’s moved up, the stop-loss price remains at the last level.
Trailing-Stop Loss Order Example
Let’s assume that you purchase 100 shares of QWE Company at RS 100 each. You put in a trailing stop-loss order for 5%. If the shares drop 5% below market price, you would automatically sell the shares.
Although you have every expectation that QWE Company’s stock will rise, if it does move against you, you’ll have limited your financial losses to 5% of the total investment. This protects you and locks in profit. If, however, the stock price rises, you will benefit from the gains.
Let’s say that QWE Company’s stock jumps in a month to Rs 200 per share. This order will only trigger if the price dips below 5% of RS 200 (RS 190).
Benefits of using Trailing-Stop Loss
When the price drop, the investors only lose a certain percentage of their investment. This order gives the assurance to the investors. But when the price rise they’ll benefit from the increase and still minimize their loss.
A trailing stop loss will work automatically with investing software. You can also put one into place manually, but this is more common for traders who are always looking at their investments.