Posted by forex at 9:47 AM
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1. Determine if your online broker allows the use of trailing stop-loss orders, as not all brokerages offer the service. Check the frequently asked questions section of your brokerage's website, or contact the brokerage's customer service department if needed.
2. Familiarize yourself with your online brokerage account. Depending on your brokerage the trailing stop function may be located in a drop down menu, or there may be box or button that you will need to check to display the tool.
3. Decide if you wish to set the trailing stop as a set dollar amount below the current stock price, or as a percentage of the price. For example, if the current stock price is $25 and you set the trailing stop at $2, the trailing stop will automatically trigger the stock to sell if the price of the stock drops below $23. If you set the trailing stop as a percentage, say 10 percent in the case of a $25 stock, the trailing stop will automatically trigger the stock to sell if the price of the stock drops below $22.50. However, as the trailing stop follows the price of the stock as the stock price rises, a $2 trailing stop will remain at $2. On the other hand, a trailing stop set as a percentage will increase as the stock price rises. For example, if a $25 stock increases to $50, a $2 trailing stop will trigger a sale if the stick price falls below $48 dollars whereas a 10 percent trailing stop would not trigger until the stock fell below $45.
4. Calculate how much of a loss you are willing to take. As the price of a stock can jump around during the day, setting a trailing stop too low can kick you out if a stock prematurely. As an example, assume a stock has a price of $25 at the beginning of the day, with a trailing stop set to $2. If the stock goes up to $28 at midmorning and then goes back down to $26 before going up to $30 at closing, the trailing stop would have triggered a sale at $26. In this instance the trailing stop would have cost from realizing a gain of $4 per share.
5. Carefully enter the type of trailing stop, either a set dollar amount or percentage, and the desired amounts into the correct fields. If in doubt, contact your broker for help until you become familiar with setting the trailing stop function yourself.