When investing in the stock market, many people want to ensure they lock in gains, while also limiting their losses. Because many people can not watch the market fluctuations on a second-by-second basis, they use tools to help achieve their investment objectives. One of those tools is called a trailing stop. A trailing stop will trigger the sale of a stock when the price hits a certain level. This ensures the investor that he will not suddenly wake up and see that his stock plummeted overnight.
Things You'll Need
- Brokerage account
Determine the current value of the stock. A trailing stop is put into place after you have already purchased the security, so this will not be the purchase price of the stock, but the current price in your portfolio. For example, say a stock in company X cost $20.
Determine what percentage you will allow the stock to fall before selling. The answer to this question will be different for every investor, as it is based on personal choice and risk tolerance.
Calculate your minimum return on investment using a trailing stop. Once you set your trailing stop, it is locked into place until you remove it. To find the minimum sale price for the stock subtract the stop percentage and multiply it by the number of shares you chose to sell. For example, say you owned 1,000 shares of company X worth $20 a piece the equation reads:
$20 x (1.00 - .15) x 1000 = Value of Stock After Stop loss
In the equation about 1.00 represents the stock at 100 percent of it's current value. The .15 represents the 15 percent stop loss you put into place.
$20 x .85 x 1000 = $17,000
This means the stop loss would leave you no less than $17,000 in your account.
Adjust the equation as the stock rises. A stop-loss also moves along with the value of the stock. Using the example, if the stock rose to $25 per share and you kept a 15 percent stop-loss, then a price of $21.25 triggers a sale because that is 85 percent of $25. Continue to adjust your math based on the highest value of the stock. Note that if the stock merely trends lower and never makes a new high, your original stop-loss value will stay in place.
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