Trailing Stop Loss
A trailing stop-loss order is defined as an order set at a certain price below the current market price for a long position, which helps a trader maximize and protect his profit as the securityâ€™s price rises, and limit losses when its price falls. The trailing stop price is adjusted as the price fluctuates, and trails the price by a certain amount (usually a set percentage), hence the name.
For example, a trader has acquired stock ABC at $10.00 and immediately places a trailing stop sell order at 10 percent. This sets the stop price to $9.00. ABC falls to a low of $9.01, but the trailing stop order is not executed because ABC has not fallen to $9.00. Later, ABC rises to a high of $15.00 which resets the stop price to $13.50. It then falls to $13.40 and the trailing stop sell order is entered as a market order. The trader is able to lock in profits rather than hold on to the stock for too long and see the profits disappear. An important point to be noted while placing trailing stop-loss order is to analyze the securityâ€™s historical volatility. Highly volatile markets will require bigger stop-losses to avoid being stopped out by the normal daily price fluctuations.
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