Trailing stop order

Trailing stop is a type of automated order. You can initiate a sell or buy trailing stop. Trailing stop is mostly used for investors who do not have time to trade everyday or for investors who hold a long term position on a security. It allows the investors to limit their loss without compromise their chances on gaining. The trailing stop works by specifying a trail amount while placing your sell or buy order. Then that trail number will automatically follow the current market price until the price goes down and become equal to the sell trail amount. Your order is then activated to be executed at the current available market price by your stockbroker.

Let us look at a typical example: an investor bought 100 shares of stock ABC at $20 and then the stock went up to $30 a share. Since the investor wants to make sure that he or she keeps the maximum profit, the investor therefore puts a trailing stop order with a trail of $2 and a sell of $28. That means, he wants to sell no less than $2 off the current market price. If the stock price keeps going up the trail number keeps on following it. Let us assume the price now is at $35 then the trail price for selling would be $35- $2 = $33.
It is the same way for a buy trailing order but in the reverse. If the stock price goes down the trail amount moves down along with it until the stock price starts to rise and hit the trail number. Then a buy order will be executed.

In summary, always remember that the trailing stop number for a sell order will only follow the stock price if it goes up. If the stock comes down and hits the trail number then a sell order is activated.
NB: Most brokers do not allowed trailing stop orders of less than 100 shares to be submitted.