A trailing stop is simply a stop loss order that moves up as the stock moves up but doesn’t move down as the stock moves down. For instance a 10% trailing stop on a $100 stock would start off at $90 if the stock moves up to $110 the stop would also come up to $99. But if the stock fell at this point the stop would stay at the same level and get you out if it dropped to $99 or lower, thus limiting your losses while maximizing your gains.

There are a ton of advantages to using trailing stops.

1. Limited Loss Potential

No matter how good of a trader you are you will eventually have losses. You will need a way to limit them so that they do not affect your overall return that much.

If you place a 10% trailing stop on your stock, what that would mean is that you cannot lose any more than 10% of your total investment on that stock. This makes it easier to manage risk and factor it is to your money management plan.

2. Doesn’t Limit Gains

The second big advantage of trailing stops is that they do not limit your potential gain. If you decided to buy a stock and then place a 10% stop loss on it you would just be limiting your potential loss, not your potential gain. The stock could go up to infinity if it wants to and you would benefit from it, only once it pulls back 10% would your stop kick in.

3. Takes Emotions Out

Emotions have a big impact on our trading. We want to hold onto a stock when it is going up and we want to keep holding on and convince ourselves everything will be ok when it is crashing.

It is important to have your own plan, but it is also important to stick too it and not side step your original plan. This is where trailing stops can come in, all you have to do is to set them and forget them.

The trailing stop will follow the stock and get out as it turns around, hopefully giving you a nice profit. You just need to find strong stocks and determine how close you want the trailing stop to be to your stock.

This is a perfect way to “stick to the game plan” when you cannot trust yourself to do it.

To find more about the placing a trailing stop or to get other trading tips visit Shaun’s site which offers stock tips