Investors take several different measures to improve their odds of profiting on trades while minimizing as much risk and loss as possible. Two of those approaches include the Stop Loss and Trailing Stop order type.
To understand both (as well as how to use them correctly) we’ve put together this quick post.
For starters, though, it’s essential to understand that both of these are classified as “Stop Orders”. They let you trigger automatic conditions that close your position – allowing you to free up your time and automate some of your investment moves.
A Stop Loss order specifies that your position on anyone given asset should be automatically closed if prices fall below a level that you have determined previously. If you want to make sure that you never sell 100 shares of a particular stock for less than $100, for example, you will set your stop loss at $100 – guaranteeing an automatic selloff to prevent your share value from dropping any lower than that.
A Trailing Stop is similar to the Stop Loss but differs in one major area – you determine a certain percentage value loss that triggers the close automatically. A trailing stop of 5% in a long position, for example, will trigger a stock selloff if the value drops 5% from the most recent high watermark.