Trailing Stop Loss

A trailing stop loss is a type of stop loss order where the maximum allowable loss is defined as a gap between the current price and the sell price, expressed either in absolute terms or as a percentage of the current share price. As the share price moves up the trailing stop loss moves up, keeping the gap constant. However if the share price moves down, the trailing stop loss remains at it's previous highest value. When the current share price falls to or below the trailing stop loss the investment can be sold. In this way an investor is safe in the knowledge that he can protect any profits as the price moves up, with a trailing stop loss following behind.

Many brokers will allow a trailing stop loss to be set where the gap is defined in absolute terms as a fixed amount of currency units below the current price, but investors should be aware that this trailing stop does not operate like a stop with the gap defined as a percentage. For example, if you buy at £1-00 per share and set a 10p trailing stop, initially you have set a 10% stop loss. If the share moves to £1-50, the trailing stop will still be 10p which now represents just a 6.6% gap. In other words the trailing stop loss expressed as a percentage will shrink as the share price rises. If left unadjusted, the trailing stop loss could eventually be triggered by a small amount of daily volatility in share price, and you may miss further gains.

Very few brokers seem to provide a true percentage based trailing stop loss mechanism. Also with many brokers, stop orders are only be valid for 30 days or so, before the order expires unfulfilled. This means the investor has to do a certain amount of work to manage his stop orders.

What to do if you need more help

If you need more help with your specific commercial loan, mortgage or insurance requirement please speak to a professional financial adviser.

We hope you found this information useful.

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