Even though many investors recognize Trailing Stop Loss Orders as a good management tool, not all brokers use them – or know how to use them. When implemented correctly, they can help investors avoid catastrophic losses, thanks to pre-determined price settings which aim to minimize any potential investment losses. Listed here are five rules you should be familiar with before implementing Trailing Stop Loss Orders.
- Determine if your broker will allow you to use this
methodology as part of your financial strategy. It may be difficult to believe but not all brokers do. Also, not all accounts permit the use of this tool.It will be most beneficial to your overall investment plan if you can put this strategy into place. - Research the historical movement of the stock you want to buy. It will help to know the stock’s history and temperament through time with regard to price volatility. This will give you a guide to help estimate how many times your stock has moved up or down in the past and, therefore, may be likely to do so again. Likewise, you may be able to determine a cyclical guide to those movements, depending on the nature of the stock. Make no mistake – everything and anything can change to determine the stock’s price; however, an analysis of the history of the stock may show a pattern that can help you make a better determination of its potential volatility. It can help you better judge your price point.
- Decide WHEN to place the Trailing Stop Loss Order. You can place it at any time, even just after you’ve purchased the stock, if that’s your decision. You can also choose to wait a bit, monitor your stock, and choose a later point in time to put the Trailing Stop Loss Order to work. A tool that can help is StopLossTracker. It makes monitoring the status of your stocks quick, easy, and convenient; you can even do so from your mobile devices.
- Decide if you want to use a percentage of the stock’s price as your stop loss amount or if you want to specify a certain amount relative to the price. You can choose to set your stop point at $10.00 or 10% of the value of the stock, or any amount in between. Ten percent is often a good place to start. Know the amount of risk you are comfortable with and realize that, if a sale is triggered, it actually may still sell a little below the price point you set. As well, if the stock dips and then rises again shortly thereafter, your stock may already be sold at a lesser price and then you would have lost any potential profit you could have made.
- Decide whether you want the order placed for a day or if you want it to be a GTC order (Good ‘Til Canceled). You can define the length of time the order is active. If it is placed for a day, typically it will be good until close of the current day’s business. Normally, a GTC order remains in effect for 120 days; after that, it will be canceled. Some orders can be specified to have an unlimited timeframe.
Placing Trailing Stop Loss Orders can definitely work to your advantage. Learn how best to use them. Try a 30-day free trial of StopLossTracker to have convenient access to manage your investments, all at one time, all in one place.