Definition of Trailing Stop Loss

What is a trailing stop loss? What is the definition of a trailing stop loss?

Before we define the term "trailing stop loss", let's quickly explain what a stop loss is.

Let's say that you buy a stock at $10. Let's say that you want to limit your losses - if the stock trades at $9 or below, then you will sell.

You can put in a stop loss at $9, and your trading software will execute your sell order if the stock trades down to $9. This is a stop loss.

A trailing stop loss is different. Rather than setting a hard stop loss based on a particular price, you would be setting a stop based on how far a stock declines from its peak.

Let's explain. Let's say that you buy 1000 shares of XYZ at $10, and you decide to implement a trailing stop of $0.50. If the stock immediate trades down to $9.50, then your sell order will be executed.

However, let's say that the stock immediately trades up to $12. Your trailing stop would mean that if the stock traded back down to $11.50, then your sell order would be executed.

The trailing stop loss trails the price of the stock, and executes based on whether or not the stock falls a certain % (or $ figure) from its peak.

So, if you buy a stock at $100 and set a trailing stop of $5, and the stock immediately trades up to $200 and then back down to $190, then your trailing stop loss order would have been executed at $195.


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