Trailing Stop Orders: "What Is It?"

Trailing stop orders are stop orders that adjust in price with favorable market movement on the security. They follow the same trading principles and mechanics commonly associated with stop orders.

The benefits are ease of use, potential profit protection and risk management. Your order adjusts by the trail amount you set. Trailing Stop Orders are available for listed equities, over-the-counter securities and single-leg options.

For equities, the stock movement triggers a Buy or Sell if and when the stock moves against you by the amount you set in the trail price.

In a Sell Trailing Stop Order, the trigger price moves up as the stock moves up. The trigger price never declines below your original trigger price. When the stock price moves sideways or down, the trigger price never retreats from its highest advance. If the stock's price moves downward to or through the trigger price it automatically triggers an order to sell the stock.

Let's look at a Buy Trailing Stop. A Buy Trailing Stop Order is commonly used to buy-to-cover short positions. The Buy Trailing Stop or trigger price moves down as the stock moves down. Buy Stop Orders work the same as Sell Stop orders just moving in the opposite direction.

Whether a Buy or Sell Trailing Stop Order, the trigger price does not adjust if the price of the security is moving against the investor's position.

There are four different types of Trailing Stop Orders to choose from:

- Trailing Stop Loss in Dollars.

- Trailing Stop Loss in Percentages.

- Trailing Stop Limit in Dollars.

- Trailing Stop Limit in Percentages.

Remember, a Trailing Stop Loss and Trailing Stop Limit follow the same trading principles and mechanics as regular stop orders.

There are certain order parameters.

The trail value for Trailing Stop orders on Single-Leg options must be placed in dollars. Percentages are not allowed for option Trailing Stop orders.

Trailing Stop orders for Listed and OTC equities and Single-Leg options can be based on the security's Last Trade, Bid or Ask price at the discretion of the user.

Dollar trail amounts cannot exceed two decimal places.

Percentage trail amounts can only be entered as whole percentages and can be a minimum of 1% and a maximum of 30% away from the current price.

And remember, Trailing Stop Orders are not available during pre-market or after hours trading.

To learn more about the mechanics of Stop Orders, go to our module on Stop Orders.

To determine when Trailing Stop Orders makes sense for you, go to Why & When.

To Learn how to place an order, go to How To in this module.