What Is A Trailing Stop Loss? When Should You place The Same?

Classroom

oi-Sunil Fernandes

By Sunil Fernandes

Published: Friday, June 17, 2016, 10:25 [IST]

We all know what a stop loss is. In any case for the uninitiated let us begin by answering the simple question: what is stop loss?

Stop loss is a simultaneous order, where you cut your losses. In short, you book losses instead of a profit.

Let us explain stop loss with an example. You have bought shares of SBI at Rs 190 and want to sell it the same day at Rs 192. However, you are not sure if the stock will move up or down. You decide that if it moves lower, there is only a certain amount of risk that you can take.

So, you place a stop loss order for selling automatically if the share price reaches Rs 189.

The stock will be automatically sold, if your share price reaches the limit of Rs 189.

How does a trailing stop loss work?

To understand how a trailing stop loss works, we have to first understand what a bracket order is.

A bracket order is one in which you place three set of orders. The first is the actual order, which could be a buy or sell. This is complicated and let us understand the same with an example.

Let us say that you want to buy shares and sell when the price is higher and restrict losses, if the share goes lower. In this case, you can place a bracket order.

If you want to buy the shares of PNB at Rs 90 and want to sell the same if you make a profit of Rs 91 and sell the same at Rs 89 to restrict further losses, you place three orders, which is called a bracket order.

Read more on bracket orders here

Now, each time you place a bracket order, you have an option to either place a stop loss order or a trailing stop loss.

In a trailing stop loss order each time your trade moves in a direction that is favourable to you by a particular number of ticks, the stoploss would also move up or down.

When should you place a trailing stop loss order?

When you want to keep tracking your losses, you can place a trailing stop loss order. These kind of orders are for seasoned professional traders only. You need to also understand the software before you place these kind of orders.

In any case what we advocate, if you are a trader, is to always place a stop loss, never mind, if it is a bracket order or a trailing stop loss order.

GoodReturns.in