Trailing stop losses are stop loss orders in which the price involved is set at a predetermined percentage that is less than the current market price. The beauty of the trailing stop loss is that if the market price increases, the stop loss order price will increase in proportion to the change in market price. But if the market price should decline, the trailing stop loss price will remain the same.
The use of a trailing stop loss is a great benefit for the investor. Utilizing this approach to investing means that the investor is able to establish a limit on the degree of loss that it is possible to incur. At the same time, the ability of the trailing stop loss to adjust upward when the market swings upward means there is no limit at all on the potential to earn a return. This means the trailing stop loss approach minimizes the chances of loss but does not inhibit the ability to increase the value of the investment portfolio at all.
Another advantage of a trailing stop loss is that the investor can set the stop loss price and then devote attention to other matters. There is no need to constantly monitor the current price of the stocks involved in the arrangement. If the unit price for the stock fall below the trailing stop loss price, an order to sell is automatically executed. The investor does not have to be concerned with the loss of more funds due to the continued drop in the value of the stock.
Many analysts recommend setting the trailing stop loss at ten to fifteen percent below the current market price. This is assuming the price paid for the stock initially is within five to ten percent of the current value of the stock. In the event that the stock begins to drop in value, the stock will sell at the trailing stop loss price and the investor will either lose nothing or incur a minimal amount of loss.