Lock in Stock Profits with Trailing Stops.

If you’re like most stock traders/investors, you trade or invest in stocks to make a profit. But how can you improve your chances of making a profit?

Well, one way is by using “trailing stops” in your stock trading.

I bring this up because today I read a great article on InvestmentU.com by Floyd G. Brown about trailing stops.

So, you might be asking yourself: what is a trailing stop? And why should I use it?

According to Investopedia.com, a trailing stop is a stop-loss order set at a percentage level below the market price – if you have a long position (you want the stock price to rise). As the stock price moves up, the trailing stop price moves up at the same percentage level as was set in the beginning.

For example, if a stock is trading at $10 a share and you have a 10% trailing stop, the stop-loss would be set at $9 ($10 x 10% = $1. $10-$1 = $9). If the stock moves to $12, the trailing stop (stop-loss) would be set at $10.80 ($12 x 10% = $1.20. $12 - $1.20 = $10.80). By using trailing stops in this example, if the stock drops from $10 to $9, the stop-loss order kicks in, your broker sells your stock and you have a loss of only 10% or $1.

By now, you probably can see that by using a trailing stop, you can lock in profits and cut your losses if your stock suddenly drops to the level of the trailing stop. On the flip side, you can let your profits run while protecting your downside.

This sounds great, doesn’t it? Well, there are always two sides to every investment strategy. In certain instances, using trailing stops (stop-loss orders) can do more harm than good to your portfolio.

So, or a more detailed look at the idea of using stop-loss orders, check out this article on Schwab.com. And after you digest all this info, let us know your take on trailing stops.