Start the conversation
But in order for trailing stops to work, investors must understand how and when to use them.
Money Morning's Chief Investment Strategist Keith Fitz-Gerald knows all about "risk management" when it comes to money. He's been investing and trading for more than 30 years.
Fitz-Gerald says "it's not that investors don't want to control risk, they're just not sure how and they don't make it a priority."
After all, the key to getting rich is by not losing your money in the first place. And this takes discipline. You've got to know how to make investment strategies work for you.
Here's how trailing stops can help.
First, What Are Trailing Stops?
A regular stop loss is based on the absolute value of a stock's purchase. Its job is to limit an investor's loss on a position should the stock trade below a certain price. If this predetermined price is hit, shares of the falling stock are then sold at the next available price.
A trailing stop, however, adjusts itself to a stock's price change. When a stock price increases, the trailing stop "trails" it upward a predetermined percentage point away from its current market value. Should the share price fall, the trailing stop holds at a predetermined percentage point below its value, preventing further loss.
Here's an example: Let's say you purchased a stock in XYZ for $50 per share and put in place a trailing stop of 15%. At $50 a share, you'd have a $42.50 trailing stop. Should XYZ's stock go up to $60, your trailing stop would rise to $51 (earning you, in this case, $1). If the share price goes up even further to $70, your trailing stop would rise to $59.50.
On the flip side, if XYZ never rises but instead drops as soon as you buy it, your trailing stop has been set for $42.50. That 15% is the maximum loss.