Trailing stop-loss orders are a type of stop-loss order that adjusts automatically as the stock price moves in your favor. Here's a step-by-step guide on how to use trailing stop-loss orders in stock trading:
- Determine your desired trailing stop percentage: The trailing stop is a percentage below the stock's highest price since you bought it. For example, if you bought a stock at $50 and set a trailing stop of 10%, the trailing stop would be $45 (10% below the highest price of $50).
- Place a buy order: Buy the stock at your desired entry price.
- Set the trailing stop order: Once the stock is bought, place a trailing stop-loss order with your broker. Specify the trailing stop percentage, such as 10%. If the stock's price drops 10% from its highest value since purchase, the order will be triggered.
- Monitor the stock price: As the stock's price moves up, the trailing stop follows the stock's highest price. If the stock's price decreases, the trailing stop remains fixed at its highest value.
- Manage your position: If the stock's price rises, the trailing stop will adjust automatically and maintain the specified percentage below the highest price. If the stock price drops, the stop-loss order is not executed until the stock price falls by the trailing stop percentage.
- Sell if the trailing stop is triggered: If the stock's price drops by the trailing stop percentage from its highest value since purchase, the trailing stop-loss order will be triggered, and your position will be sold at the market price.
It's important to note that trailing stop-loss orders have limitations. They do not protect against gaps in the market or sudden price drops, and their execution depends on liquidity. Additionally, trailing stops may not guarantee the desired outcome, so it's crucial to continually monitor your positions and adjust your trailing stop order if necessary. Always consult with a financial advisor and consider your risk tolerance before using trailing stop-loss orders or any other trading strategy.