A Trailing Stop order is designed to let the price of a stock go up indefinitely and close the position when the price falls a set amount, protecting you from losing your profits. A Trailing Stop is a stop-loss order that is set at an amount below (for a long position) the market price. The amount is then automatically adjusted as the price of the security fluctuates. A trailing-stop maintains a stop-loss order at a precise value (known as the "Trailing Delta") below (or above, in the case of a short position) the market price. The stop-loss order is adjusted continually based on fluctuations in the market price, always maintaining the same percentage below (or above) the market price.
For example, if you own stock XYZ at $10. The stock is currently trading at $9.75 and you are willing to let it go down $.50 (down to $9.25) before selling the stock. In this instance you would enter a sell trailing stop order with a trailing delta of $.50. If the stock hits $9.25, the system will place a sell market order.
Each time the price increases from the price entered, the stop price is also automatically adjusted. For example:
If the price of XYZ were to go up the $9.90 and then back to $9.40, a drop of $.50, the system will send the sell order
If the price of XYZ goes to $11 and then back down to $10.50, a drop of $.50, the system will send the sell order
NOTE: Unless you have a reason
to use a different exchange, we suggest you use the AUTO
button for your trailing stops. Some exchanges, such as Instinet, will
not accept trailing stops.
Graphical Example:
In this example, stock XYZ is purchased for $15, with a trailing amount
of $5, creating an initial trailing price of $10. As the current price
increases $5 (to $20) so does the trailing price (to $15). When the current
price drops (to $18), the trailing price remains $15. The current price
reaches a height of $25 creating a trailing price of $20. When the current
price drops $5 from its height to match the trailing price, a market sell
order executes to sell the stock