Ask Mike:
What is a 5 cent trailing stop?

Question:

Hi Mike,

Just a quick question: When you say you 'will be putting on a 5 cent trailing stop after this e-mail', what does that mean?

Thank you,

Richard from Tigard, OR

Mike's Response:

Hi Richard,

A trailing stop is a stop loss price that is set by any amount you want, such as 5 cents, below the price of the stock at the moment you put on the trailing stop.

As the stock moves up in price, the stop moves up immediately, penny-for-penny.

When the stock's price moves lower, the stop does not move.

For example, if a stock is trading at $30 per share and you put a 5 cent trailing stop on the stock, then initially, the stop is $29.95.

If the stock moves to $30.02, the stop would move to $29.97. If the stock moved to $34.00, the stop would move to $33.95... and, so on.

If the stock's price drops by 5 cents or more at any time, the 5 cent trailing stop is triggered and the stock is immediately sold at market.

Here's an example of what I mean: Let's continue with the example above. The stock's price has moved up to $34.00. The stop loss (if it is a 5 cent trailing stop) would be $33.95. Now, let's say the stock's price moves to $33.99 the stop loss would still be $33.95. Let's say it drops lower to $33.96 the stop loss is still $33.95. Now, let's say it jumps back up to $34.50 the stop loss would immediately jump to $34.45. If the stock's price drops back to $34.00, the stop loss would be triggered when it moved below $34.45 and sold at market which would be whatever the broker could get for the stock at that time... not necessarily $34.45.

Trailing stops are great when you have decided to exit a position. That is the only time I use them. It allows you to squeeze out a little more upside if the stock is moving upward.

Keep in mind that some brokers do not provide trailing stops and some do not provide 5 cent trailing stops.

Regards,

Mike