Trailing Stop Orders: "Why & When?"

Why does it make sense to use a Trailing Stop Order? When you want a convenient way to manage risk and lock in potential profit, Trailing Stop Orders can help you do that.

There are several occasions when a trader will use a trailing stop.

Some traders use Trailing Stops immediately after buying a stock. They may want to set a certain dollar or percent cushion in case the stock moves against them.

This allows you to remove the emotion from your trade. And you know if the stock moves negatively by your trail amount you will be taken out of your position.

You must remember that your stop price will move with a positive move in the market, so if you don't want that to happen a regular stop order would work better for you.

A Trailing Stop Order is commonly used to protect profits while allowing you to continue to take advantage of upside potential.

Once you've made a profit on your trade you may want to limit your downside and lock in a potential profit.

So, an example may be that you bought a stock at 30. You're up on a trade by 10 points so the current price is 40. You may want to open a trailing stop order with a trail amount of 3 dollars. Now you're stop loss order is set at 37 dollars. This will help you lock in a potential profit of $7. And if the stock moves in your favor, your profits may increase because your trigger price will move with a positive movement in the stock.

Finally, investors use Trailing Stop Orders for convenience.

Instead of having to manage your stop orders each and every day. Fidelity will manage them for you based on the parameters that you've set. Whether you are going on vacation or just don't have the time to watch your stocks as closely as you'd like, a Trailing Stop can make life easier for you!

So remember, if you want a convenient way to manage risk or potentially protect your profits, Trailing Stops may be just what you need to take you to the next level.

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