Trailing stop order
A trailing stop order lets you track the price of a stock before triggering a market order if the stock reaches the trailing stop price. Investors often use trailing stop orders to help limit their maximum possible loss or as part of an exit strategy.
With a trailing stop order, the trailing stop price follows or trails the price of the stock by a trail that you specify. If the stock’s price moves in a favorable direction, the trailing stop price will move with the stock. If the stock’s price moves in an unfavorable direction, the trailing stop price will stay the same.
If the stock’s price reaches the trailing stop price, a market order is triggered and is executed at the best price currently available. Keep in mind, short-term fluctuations in a stock’s price can trigger a trailing stop order. Also, you aren’t guaranteed a price with a trailing stop order.
With a buy trailing stop order, the stop price follows, or trails, the lowest price of a stock by a trail that you set. If the stock rises above its lowest price by the trail or more, it triggers a buy market order and is executed at the best price currently available.
You want to buy MEOW, but you think it will fall in value and want to wait to purchase it. You also think that if MEOW goes up by a defined amount (let’s say 5%) it may go even higher. In an attempt to help minimize potential costs, you set your trail to 5%. Your stop price will always remain 5% above MEOW’s lowest price.
MEOW is currently trading at $110 per share. Your stop price will start at $115.50, which is 5% higher than the current price of MEOW.
With a sell trailing stop order, the stop price follows or trails the highest price of a stock by a trail that you set. If the stock falls below its highest price by the trail or more, your sell trailing stop order becomes a sell market order and the stock will be sold at the best price currently available.
You own MEOW. You think MEOW will rise in value, but want to help protect yourself in case it falls in value. If you set your trail to 5%, your stop price will always remain 5% below MEOW’s highest price.
MEOW is currently trading at $100 per share. Your stop price will start at $95, which is 5% lower than the current price.
If MEOW falls to the stop price ($104.50) or lower, it triggers a sell market order. MEOW will be sold at the best price currently available.
To protect your account against overspending, we’ll over-reserve your buying power for stop buy orders and trailing stop buy orders.
Keep in mind, these percentages might change in response to extreme volatility.
The examples included in this article are for illustrative purposes only. In general, understanding order types can help you manage risk and execution speed. However, you can never eliminate market and investment risks entirely. It’s usually best to choose an order type based on your investment goals and objectives.
All investments involve risks, including the loss of principal. Investors should consider their investment objectives and risks carefully before investing.
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