Using a trailing stop in your stock trading is a handy way to protect your profits as well as limit your losses. One of the obvious and best advantages of using a trailing stop is that it's possible to limit your losses if the market starts to move against your current position. It is also possible that your gains can be limitless.



The trailing stop gets its name, because it is dynamic, it trails the movement of the stock price as the stock moves in your direction. Let's say for instance you've purchased a hundred shares of XYZ company for $50 a share. Let's further say that you have decided that you will limit your losses to two dollars and that this will be the size of your trailing stop. If the market immediately moves against you, then all 100 shares will be sold at the stock price of $48 and your loss at this point will be two dollars times 100 shares or $200.

Now let's examine the different scenario. Let's examine a scenario that we would actually love to see happen. Let's say the price of the stock goes in our favor, and then goes to $55 per share. At this point the trailing stop would move from $48 per share to $53 per share. Now if the market moves from the current price of $55 per share to $53 per share, then, we are fortunate to have locked in a profit of three dollars per share, times 100 shares for a profit of $300. We were able to profit even though the market did not continue to move in our direction at the time.

Like any other tool in your stock trading toolbox trailing stop orders have their place and their uses. The real objective, of course, is to preserve profits as the market moves in your direction. The trailing stop order may not be perfect for each and every stock transaction that you make, but it has tremendous flexibility when used correctly.