Trailing Stop Orders

# Trailing Stop Orders

Last updated 25th Apr 2022
Disclosure

## Definition

The term trailing stop order refers to broker instructions that provide the investor with more flexibility than a fixed stop loss order. The stop loss price for a trailing stop order will track the upward movement of a security; remaining a specified percentage below its market price.

### Explanation

As is the case with a standard stop order, a trailing stop order can be used to buy or sell a stock when the market price of the security reaches the stop price. When that occurs, the order then becomes a market order.

A trailing stop order provides the trader with additional flexibility because the stop value can move up or down with the market price of the security. With this type of order, the trader specifies the distance, in terms of a percentage, that the stop value will remain from the market price of the security.

Traders can utilize a trailing stop to protect their initial investment as well as potential profits realized from any increase in the price of the security. When combined with a Time-in-Force order, the trader does not have to closely monitor the market on a daily basis.

### Example

A trader just purchased 1,000 shares of Company ABC's stock for \$20.00. The trader would like to protect their investment from a loss, so they immediately place a Good-Til-Canceled trailing stop order to sell the securities when its market price falls 10%. In this example, the initial stop price is \$20.00 - (10% x \$20.00), or \$18.00 per share.

Over the next two months, Company ABC's stock increases to \$24.00 per share. Since the trader placed a trailing stop order, the new stop price is \$24.00 - (10% x \$24.00), or \$21.60 per share. Let's assume that after hitting a high of \$24.00 per share, Company ABC announces they will miss their earnings target in the coming quarter and the price of the stock declines to \$20.00 per share. When the stock's market price hit \$21.60, a market order was placed and the trader's 1,000 shares were sold, thereby locking in a profit of \$1.60 x 1,000 shares, or \$1,600.