A Trailing Stop Order is a type of stop order that automatically adjusts as the market price moves in your favor. It helps you lock in gains or enter a position after a price reversal, without constant monitoring.
Trailing Stop $: The stop price moves by a fixed dollar amount.
Trailing Stop %: The stop price moves by a fixed percentage.
When the price moves favorably, the trailing stop “trails” the market price by the specified amount or percentage. If the price reverses direction by that amount, the order is triggered.
Selling vs Buying
Sell Orders: Used to protect profits or limit losses. The stop price moves up as the stock rises, but stays fixed if the stock falls. If the price drops by the trailing amount or percentage, the order triggers.
Buy Orders: Used to buy after a pullback. The stop price moves down as the stock falls, but stays fixed if the stock rises. If the price rebounds upward by the trailing amount or percentage, the order triggers.
Examples
Trailing Stop $ Sell
Scenario: Frank buys XYZ at $10 and sets a sell trailing stop amount at $2.
How It Works:
If XYZ drops to $8, the order triggers and sells, limiting the loss to $2.
If XYZ rises to $20, the stop price moves up to $18. If the price then falls to $18, the order triggers, locking in most of his gains.
Strategy: To protect profits as the stock rises while limiting downside risk.
Trailing Stop $ Buy
Scenario: Sarah wants to buy XYZ, currently at $50, but expects it to dip before rebounding.
How It Works:
She sets a trailing stop buy amount at $3.
If XYZ falls to $45 (the lowest price), the buy stop price becomes $48 (the lowest price + $3).
If the price rebounds to $48, the buy order triggers.
Strategy: To buy after a pullback, ensuring the stock shows upward momentum before buying.
Trailing Stop % Sell
Scenario: Frank buys XYZ at $10 and sets a sell trailing stop at 20%.
How It Works:
If XYZ rises to $20, the stop price adjusts to $16 (20% below $20).
If the price falls to $16, the order triggers, locking in most of the gains.
Strategy: To allow for larger price swings while still protecting profits.
Trailing Stop % Buy
Scenario: Sarah wants to buy XYZ at $50 with a trailing stop buy of 5%.
How It Works:
If XYZ falls to $45 (the lowest price), the buy stop price becomes $47.25 (the lowest price × 1.05).
If the price rebounds to $47.25, the buy order triggers.
Strategy: To buy after a pullback with a percentage-based cushion, useful for volatile stocks.