It’s based on this concept:Ĭut your losses, and let your winners ride.įar too many people get emotional with their investments. You can easily maximize profit and minimize loss with this one move. Why Is Monitoring Downside Risk So Important?īefore you jump into the market, make sure you have an exit strategy taken care of. That’s a much worse situation than losing a couple more percentage points. It’s much better than the alternative, which is a stock that skips under the limit and keeps crashing. Losing a few more percentage points than 25% (because of no limit), is fine in this case. Though it sounds like a good idea, many investors prefer the trailing stop over a trailing stop limit. In this example, you would’ve sold at $7. If you only had a stop loss, without a limit, your broker would’ve just sold your stock as soon as it crossed below $9. So, the stop limit protects against fast price declines. If the stock suddenly crashes to $7, making your sell order at $7, the broker would not execute the stop loss because it is below your limit of $8.50. Your trailing stop loss is $9, and you put in a stop limit at $8.50. In this case, a “limit” prevents the broker from executing a trailing stop trade “at the market”, and would keep you in the stock if the stock suddenly crashed below your “limit”.įor example, say you have a stock trading at $10. How a Trailing Stop is Different From a Trailing Stop LimitĪ trailing stop limit is an order you place with your broker to hopefully better react against large swings in price (or “flash crashes”). Once it stops its run up, the trailing stop locks in your profits and protects you from further price decreases. If the stock goes up instead of down, you get to ride it all the way up. With any investment, you will lose, at most, the trailing stop amount. What this does is significantly reduce your downside risk. With the stock at $200, the trailing stop is $150.

So, as the stock hits $125, $150, and $175, the trailing stop raises. The protective trailing stop trails along with it. Let’s say that my stock has risen to $200. If the stock falls to $75 at any time, I sell. If I set a 25% trailing stop, my trailing stop will be 25% less of $100, or $75. Buy and Holdįor value investors, we’ll end with a recommendation on how I think you could apply these strategies, though ultimately, I no longer use them myself.Ī trailing stop works like this.

Why Is Monitoring Downside Risk So Important?.

We will discuss what a trailing stop limit order is, and why it is important, in these sections: It is different from just a trailing stop. It places a limit on your loss so that you don’t sell too low.īut, the “limit” refers also to the type of order placed with the broker. A trailing stop limit is an order you place with your broker.

Trailing stop