When you buy a stock, you’re essentially buying a small piece of a company. You hope that the company will do well and the stock price will go up so that you can sell it for more than you paid for it and make a profit.
However, sometimes the stock price doesn’t go up, and instead, it goes down. If you hold onto the stock, you could end up losing money. That’s where a trailing stop loss comes in.
A trailing stop loss is like a safety net that you put in place when you buy a stock. It’s an order that you give to your broker that says if the stock price drops below a certain level, you want to sell the stock automatically. That way, you limit your losses and don’t lose too much money.
The “trailing” part of the stop loss means that the level at which you sell the stock changes as the stock price changes. So, if the stock price goes up, the level at which you sell the stock goes up too, so you can still make a profit if the stock price rises.
To put it simply, a trailing stop loss is a tool that helps you protect your investment and limit your losses while still giving you a chance to make a profit if the stock price goes up.
Here’s an example to help illustrate how a trailing stop loss works:
Let’s say you buy a stock for $50 per share, and you set a trailing stop loss at 10%. That means that if the stock price drops by 10% or more, you want to sell the stock. The trailing part means that as the stock price goes up, the level at which you sell the stock also goes up.
So, if the stock price rises to $55 per share, the trailing stop loss would adjust to $49.50 (10% below the current market price). If the stock price continues to rise and hits $60 per share, the trailing stop loss would adjust to $54 (10% below the current market price). If the stock price then drops to $54 or lower, the trailing stop loss would be triggered limiting your loss to 10% of your initial investment.
The idea behind a trailing stop loss is to help you protect your investment in case the stock price goes down while still allowing you to take advantage of potential gains if the stock price goes up. It’s important to remember, however, that the market can be unpredictable, and no strategy can guarantee profits or prevent all losses. So, it’s always important to do your research, set realistic goals, and monitor your positions regularly.