Trailing stop orders are designed to help you protect any gains and limit losses automatically. The order follows the stock's movement tick by tick so you don't have to.
With a trailing stop order, you set the stop as a distance in either points or percent from the stock's current bid or ask price (the bid price for sell orders and the ask price for buys). This is in contrast to a regular stop order, where the stop is set as a fixed price.
After you submit your trailing stop order, the stop price adjusts itself automatically, following (or "trailing") the stock's bid or ask price, but moving only in a direction favorable to you, in accordance to the parameters you defined for your order. All trailing stop orders are held at E*TRADE Securities until triggered. Once the bid or ask crosses the current stop price, the order is triggered and sent to the market center for execution as a market order and then executed at the prevailing market price. To learn more about how to use trailing stops, see our interactive tutorial.
As a hypothetical example, let's say you own shares of stock XYZ (currently trading at $15), and you decide to place a trailing stop order with a trailing stop value of $1. (You can also set this value as a percent.) This means that you want to sell the shares when the bid price falls $1 from the highest point it reaches after order placement. In other words, $1 is the maximum you want your trailing stop level to be away from the prevailing bid price. Your initial trailing stop level, then, gets set at $14 – or $1 below the current bid – and the trailing stop will ratchet up if the stock price rises. If XYZ climbs to $18 without falling $1 at any point along the way, your trailing stop level will rise to $17, moving up in lock step with the bid price. If XYZ then dips below $17, your order will then be triggered and sent to the market center for execution as a market order. In the same way, if the stock had immediately fallen from $15 to $14, your order would have been triggered for execution at that time.
When placing a stock order with a trailing stop, your trailing stop value must be at least $0.01. If you enter the value as a percent, keep in mind that the percent is also subject to the same requirements.
Notes:
Trailing stops can be placed only for NYSE, Nasdaq/NMS, and Nasdaq SmallCap securities trading at $1 or more per share. The $1 minimum applies to the bid price for sell orders and the ask price for buys. If the price falls below $1 after order submission, the trailing stop will remain valid.
Trailing stops cannot be accepted for Pink Sheet or OTC Bulletin Board securities or for preferred stocks, rights, or warrants. Also, some securities will occasionally be restricted due to trading halts or unusual market conditions.
In most situations, when a trailing stop order becomes a market order, it will execute at a price equal to or very close to the bid or ask price at the time the order was triggered. For securities with low trading volumes, however, market centers may require additional time for order execution. In these cases, it is possible that orders will be executed higher or lower than the price that triggered the order...
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