The Benefits and Limitations of Trailing Stop Orders
Trailing stop orders are an important part of setting up your trading plan. They lock in your profits while preventing you from making a further loss. You may want to adjust your trailing stop percentage as your stock’s price increases. Just like stop-loss orders, trailing stops will execute as limit orders. While you might be tempted to ignore this rule, it’s important to understand that these orders are often better than trailing stop losses.
A Trailing Stop order remains in effect until triggered. Once the trigger price is reached, the trailing stop order becomes a market order and is submitted for immediate execution. While there is no guarantee that the execution price will match the trigger price, it is important to note that the trailing stop order will not be cancelled if it reaches its target price. Its percentage will change as it is recalculated each time it crosses the trigger price.
If the stock price rises to $40, a trailing stop of $27 is issued to protect the stop. If the stock moves up to $50, the trailing stop will trigger a sell order. The trailing stop order is a way to limit your losses while locking in your profit. This strategy is most effective when you’re looking to limit your losses. A trailing stop will protect your profits even if you’re forced to sell. If the stock falls below the trailing stop, the market order will trigger.
A trailing stop order is set up to work automatically through most brokers. You can also monitor it manually and adjust the limit price accordingly. A trailing stop will move up every time the price rises by at least five cents. A trailing stop order will also prevent you from losing your profits if the price drops. When it falls, a trailing stop will stay in place. This strategy is useful for traders who want to lock in profits as soon as possible.
Despite the many benefits of trailing stop orders, a trader must know the limitations of this strategy. In addition to its limitations, a trailing stop order can cause your stock to hit a stop limit that is too tight. This can result in significant losses if it is set too high. And, while a trailing stop will keep your stock from reaching a low point, it can trigger a temporary price pullback and trigger a triggered stop order. In this way, it can cause psychological distress if the stop is too tight.
In addition to limiting losses, a trailing stop order allows you to make changes to your stop order anytime you want. For example, if you’ve entered a stop order at $125 and it moves up to $160, you can move your stop loss up by entering a new order with the same price. This action cancels the previous order and simulates a trailing stop effect. You can also adjust your trailing stop order before execution by tightening or loosening it.