What is a Trailing Price Stop?

Explanation
We define a Trailing Price Stop as a "stop order" to sell a security if it decreases in value and closes by a pre-selected percentage (also known as your Risk Factor.) The strategy operates on a Closing Basis only - meaning the stock must close at or below your Risk Factor before any action is taken.

If the price of the security falls, no action is taken until your Risk Factor is met or violated. If the security ever closes at or below the selected Risk Factor, the position is automatically sold. However, if the price of the security rises, the sell order follows (or trails) that price in order to protect profits. Note that the Risk Factor does not change in relation to the price of the security. This technique is designed to allow an investor to specify a limit on the maximum possible loss, without setting a limit on the maximum possible gain.

Why not simply use a stop order?
A stop order is an order to buy or sell a stock immediately whenever the price of the stock reaches a specified point. This method can be effective, but is vulnerable to the effects of intraday market volatility. For instance, if a security falls (or rises) to a certain price and then exceeds that price later in the same trading session, the investor will have lost potential profits. Stop orders can also result in sometimes unnecessary brokerage fees. Using a Trailing Price Stop allows you to invest with the expectation of future gains while avoiding the emotional ups and downs of daily markets.