Trailing Stop Orders

A trailing stop order can let you protect profits. As the stock price goes up, you can tell your broker to keep trailing it and only sell if it falls, say, $2 from its highest price ever. At that point, the order gets converted to a market order.

One way to protect gains and limit losses automatically is by placing a trailing stop order. With a trailing stop order, you set a stop price as either a spread in points or a percentage of current market value.

Imagine you purchased 500 shares of Hershey Chocolate at $50 per share; the current price is $57. You want to lock-in at least $5 of the per share profit you’ve made but wish to continue holding the stock, hoping to benefit from any further increases. To meet your objective, you could place a trailing stop order with a stop value of $2 per share.

In practical terms, here’s what happens: Your order will sit on your broker’s books and automatically adjust upwards as the price of Hershey’s common stock increases. At the time your trailing stop order was placed, your broker knows to sell HSY if the price falls below $55 ($57 current market price - $2 trailing stop loss = $55 sale price). Imagine Hershey increases steadily to $62 per share; now, your trailing stop order has automatically kept pace and will guarantee at least a $60 sale price ($62 current stock price - $2 trailing stop value = $60 per share sale price). In other words, the trailing stop order will increase in your favor and lock in any gains you’ve made in the interim. If Hershey were to fall to $60, your trailing stop order would convert to a market order for execution, your shares would be sold, and should result in a capital gain of $10 per share.