Part 5: Trailing Stop Orders
Dynamically adjust your order price
Note: Trailing stop orders aren’t available on Canadian exchanges through Questrade. But our next and last order type, trailing stop limit order, are.
Trailing stop orders of all kinds offer a rather valuable aspect – they allow you to place an order and have the price dynamically adjust to ensure you get the highest return possible.
Typically, we use trailing stop orders when we’re selling. We already hold the security, and we want to lock in a certain amount of gain. With a regular stop order, we could do that, but we might end up giving back a lot of our return. If we bought $VT at $50, and now it’s at $56, we could enter a stop order at $54, ensuring we make at least $4 on each share (assuming we don’t get gapped – see our discussion of stop orders for more detail). But if the stock rises to $60, then back to $54 and sells, we earned none of that higher return we could have had if we’d just manually sold at $60. We left a lot on the table – $6 for every $4 we did get.
With trailing stop orders, instead of entering a stop price, we enter a trailing amount, which is essentially a spread from the current price to the price we’re willing to sell at. If we enter a $2 trailing stop on $VT trading at $56, the stop order will trigger (and become a market order) at $54. But if the price first rises to $60, with a $2 trailing stop, our new stop order is at $58. If the stock then falls to $58, we get $8 per share – twice as much as the $4 we made using a stop order, and we leave only $2 on the table.
In the case of buying with a trailing stop order, our $2 trailing stop is now above the current price, at $58. If the security falls from $56 to $50, our stop is now at $52. If the stock then rises back to $52, our order is triggered, and our stop order becomes a market order at $52. The most obvious use of this order is for covering a short position, but some investors might find use for it when opening a position. If you were intending to purchase the stock only if it fell and then exhibited some recovery, a trailing stop would do that for you.