How to Use a Trailing Stop Loss

Thứ bảy - 27/04/2024 01:09
A trailing stop loss is a type of stock order. Using this order will trigger a sale of your investment in the event its price drops below a certain level. The trailing stop loss order can help make the decision to sell easier, more...
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A trailing stop loss is a type of stock order. Using this order will trigger a sale of your investment in the event its price drops below a certain level. The trailing stop loss order can help make the decision to sell easier, more rational and less emotional. It is designed for the investor who wishes to minimize risk, helping him or her minimize losses while maximizing potential gains.[1] With the trailing stop loss, it all happens automatically, so you and your trader don’t constantly have to watch the stock price.

Part 1
Part 1 of 2:

Understanding a Trailing Stop Loss

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Part 2
Part 2 of 2:

Placing a Trailing Stop Loss Order

  1. Step 4 Choose a fixed or relative amount.
    As noted, a trailing stop loss can be created in one of two ways. You can either use a fixed price or a relative one based on a percentage.[5]
    • For example, you can determine either a strict dollar amount (e.g., $10) for the trail or a percentage of the stock’s value (e.g., 5%). In either case, the “trail” is related to the value of the stock. This trail changes over time as the price of the stock changes.
    • By using the fixed-dollar option, you limit to a strict dollar value the amount the stock can go down from its highest point before a sell order is automatically placed. Dollar amounts cannot have more than two decimal places (in other words, no tenths of a cent.)[6]
    • By using a percentage approach, you can define the appropriate range to allow the stock to go up and down while in a generally rising trend. Percentages used must be between 1% and 30% of the current price.[7]
    • Know the risk. The risk with any stop loss is that the stock may dip below the sell point and trigger a sale. Then the stock may reverse and go back up, leaving you behind without the newly accrued profit.
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Warnings

  • Choose a traditional stop loss order for highly volatile stocks.[11]
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