Investing - Trailing Stop Orders

Posted on 2007-03-31
Medium Priority
Last Modified: 2008-01-09
I trade with TD Ameritrade. They have an order called aTrailing Stop Order, where you can enter a buy order whiich is to become active at a specified amount above the current price (simplifying a bit here) or a sell order which is to become active at a specified amount below the current price. The trailing part of the equation is that the activation price for a buy TS Order will fall if the current price falls - (and vice versa for a sell TS order.)

However, they require an open position in order to place one of these orders. Why? If I want to buy a stock which is trending downward, wouldn't it be useful to place a buy TS order, say 1% above the current price, knowing thast my activation price is probably going to go down if the trend continues, but that if the stock starts an upward rise, I will have my order placed 1% above the lowest point the stock reached.

I could see placing a lot of my orders this way as One-Day orders. Why is this not possible?

Question by:anyoneis
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Accepted Solution

nickg5 earned 2000 total points
ID: 18860590
A stop order is an order on the shares you are "lomg" or "short".
If you own 100 shares of IBM and the current price is $90, you place a stop loss oder. You can set the order to kick in at some lower price that protects your profits if you have some with it up there at $90 or to reduce your losses. If you have a market order stop loss, the stop loss order kicks in at the price you set. Say, $87, and your stop order immediately becomes a market order and your shares sell. There is a chance, a good chance, it does not sell at exactly $87. It depends on how fast the stock is moving. Stop loss orders can be helpful and harmful. The stock could fall to 87, your shares are sold and it takes off to 110. You are out of luck as your shares sold at 87. If you have  a stop limit, there will be a price at which you want the order to become a limit order, say $87. You then choose the lowest price at which you want to sell, say a limit of $86.50. This gives you a little wiggle room under your stop to hopefully have the stock to turn around and head much higher.
The reverse is true if you have shorted a stock. Suppose you are short a stock at  $53. You set your stop at $55 so your max losses are $2.00 per share.
Some people place stop orders or use "mental stops". Mental stop is YOU watch the stock and when, say IBM drops to $87 YOU have the discipline to sell it, no questions asked. If you can not pull the trigger you need a stop loss order.
Alot of investors, as a stock is going down, keep telling themselves, oh it will go back up, etc. it nevers does and they lose more thru water torture, slow declines. The stop loss order gets you out at a certain price if you are on a two week trip to Asia and can not watch stock prices.
If you want to trade without stocks, use options. You can buy 1 call option on IBM and that represents 100 shares. You can set stop orders on your option just like a stock.
Your broker is not going to let you buy a bunch if imaginary stocks and have stop loss orders. You'll have to own them or short them or use options.
Another thing to remember on stop orders is:
Suppose your IBM is $90 and you have a stop at $87. Over night, after the market closes, IBM announces that their earnings will be bad. The stock could open the next day at $80..........and you'd sell at $80.
People also adjust their stops as stocks go up. You own IBM at 90, it runs up to 95, so you change your other 87.00 stop price to 93. Now if it falls to your new stop it sells at 93 and preserves $3 of the profit you made from the $90 level.
I could discuss this and dozens of other market info for hours. The amount of info is unlimited. I am a day trader but limited to  3 "day" trades per 5 day period. A real pattern day trader can trade as many times as they want per week but need a minimum account equity. My broker is Schwab.
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Author Comment

ID: 18914840
I understand the mechanic of the trailing stop. And your explanation was excellent. I guess what I want is a "trailing start" :-)

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Expert Comment

ID: 18914867
I trade with TD Ameritrade. They have an order called aTrailing Stop Order, where you can enter a buy order whiich is to become active at a specified amount above the current price.

.....................why would you want the above...........?......................
you want to buy it "higher" than it is now?

If IBM is 90 and you want to buy some at 85 you just place a "good til cancelled" limit order to by IBM at 85 (or lower). If it goes that low, when it hits 85 your order becomes a market order. If it is moving fast when it falls from 85 1/16 to 85 you might buy it slightly lower.
If it closes on a Friday at 87 and then there is bad news over the weekend, and it opens Monday at 83, you'd buy it at 83.
You would never buy it higher than 85 unless you changed your good til cancelled order to a higher price, like 87 1/2.

If the stock is 90 and you place an order to buy at 92 or less, you'll be filled at 90.
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Expert Comment

ID: 18914876
your title of the question was:
Investing - Trailing STOP Orders

The word STOP means the order would be a SELL order. You can not BUY with a STOP.
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Author Comment

ID: 18915032
The work STOP means "STOP my LOSSES." A stop loss order, including the TRAILING STOP varieties, can be used to buy shares to limit losses on a short position, or to sell shares, to limit losses on a long position.

Now, to answer your question about why I might want to pay more than the current asking price for a stock: Let's say IBM is trending downward at $90 tomorrow morning, and let's say that I want to go long on IBM. I would like to watch it and see if it keeps going down or if it reverses course. To flip your question around, why would I pay $90 for the stock if I expect it will be below $90 in the very near future?

If I have nothing else to do, I'm going to watch it and buy it when it hits bottom. Of course, it will rise and fall the whole time, and I will have to decide ahead of time how much of a rise in price I can tolerate before I open my long position. For example, I might decide that I'll buy it if it rises to more than $90.50.

Now, let's say that it continues to drop and hits 89.90, Well, I'm not going to watch it rise to $90.50 any more, I'm going to pull the trigger at $90.40. And so on. This works well as long as I have the day off. But, since I don't, I can't do it.

That's why I want a "trailing start." Does it make sense now?


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Expert Comment

ID: 18917272
ok, you are getting into short positions, where you sell a stock you do not own. In that case, yes, a stop will buy the stock back for you at higher prices to prevent losses.
Schwab has strict financial requiements to be able to short a stock.

When you say "trailing start" do you mean on a long position or a short position? I do not think you can place an order that will buy a long stock at a price higher than it is now. You can buy a stop at a lower price. EX: It is 90 today and you place a limit order to buy at $88.

Some technicians like to buy stocks high and sell them higher, especially those that are making new 52 week highs. They say if they make one new 52 high it will make more, thus you buy higher.

I am not aware of an order I can place with Schwab that lets me buy a stock higher than it is now, unless I am covering a short position.

Gary B. Smith at Street.com uses charts. He often says "I would not buy IBM at 28, but it if rises to $30 I'd buy it."  He is using chart patterns, thinking that once it rises to 30 it is "breaking out" and ready to run higher. I am not aware of an order you can place to do this. You just have to watch it and buy it. I am watching my account about 7 hours a day. It is very hard if you can not watch your account and the trades as they happen.


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