A trailing stop is a sell order to be executed at a defined point or percentage distance away from the most favorable quote.
Trailing stop orders differ from ordinary stop orders in that, as the market price changes, the trailing stop order is automatically adjusted. In the case of ordinary stop orders, traders must cancel existing stops and replace them with new stops in order to keep pace with the market.
When a trailing stock triggers, it becomes a market order. In a calm market that means it will trade at near the bid price at the moment. In a hectic market it goes into the queue and executes in turn sometimes at a substantially lower price.
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can someone provide an example of a trailing stop in action, such as if a stock is trending down a point a minute, when does the trailing stop actually generate the sell. thx
Assume the stock normally fluctuates not more than 1.50 per day and on average is increasing in price steadily. Look at the Charts -> Technical Indicators -> Upper Indicators -> Price Channel with a 1-day limit to eye-ball the daily fluctuations.
When you write a Trailing Stop Order you select the maximum drop from the peak you will allow before selling. Let's call that 2.00 for this example.
Let's say the price is gradually increasing, from your purchase of 40, to 60 and then declines to 59, rises to 61, declines to 58 and rises again to 60 (with minor fluctuations along the way). Your sell price tracks right along with the stock price until the decline starts. Then it freezes at the peaks of 59 and 61. On the day the price fell to 58, the peak was at 59 and frozen, that's a difference of $1.00 and that drop did not trigger a sell order. The trigger you set for the order was $2.00, so the day that had the $3.00 drop triggered the Market Rate sell order as it went past $2.00 less than the current peak of 61.
This means you will usually miss the peak by at least $2.00. Setting a stop value that is less than the daily fluctuation is probably not useful since it might trigger in a single day.
If the price had dropped by exactly 2.00 and immediately rose again, you were lucky and your market price might actually be less than 2.00 less than the peak (i.e 61 - 2 = 59 to trigger; but market price rose to 59.2 so that might be the price you were lucky enough to get). If there's a gap (close at 60 one day open at 55 the next), your order will trigger because of the 2.00 difference, but your price might be 55.
You can either set a dollar amount or a percentage decline from peak value as your criterion.