The art of Using Trailing Stops

The video provides a tutorial on how to place trailing stop orders.  Trailing stop can be looked at as moving stop orders which continue to move higher as the stock does.  They allow the trader to reap the profits of a trending stock while keeping in a form of downside protection in at all times.  For example, suppose a trader purchased a stock for $50 and would like to stop it out if it drop below $45.  Now assume that the stock moves up to $60 and the trader would like to lock in some profits but still believes that the stock moves higher.  This is where a trailing stop order comes in handy.  The trader can place a trailing stop in the amount of $5; therefore, as the market moves higher, so does the stop price.  In this case, it would move up to $55.

As long as the stock keeps going higher, so does the trailing stop order.  However, if the stock starts to move against you, the trailing stop order will remain constant, thereby, locking in some profits.

It is important to understand that some technicians do not like using trailing stop orders as they do not necessarily coincide with technical support and resistance levels in the market.