Feature Highlight – Trailing Stop Orders

Investing is all about trying to maximize gains and minimizing losses. But we aren’t trying to teach students to be constantly watching every investment in their retirement account – what can the average investor use to protect their nest-egg without limiting their investment growth?

Introducing Trailing Stops

There are more options when investing than just entering a “Buy” or a “Sell” – you can also specify instructions (such as “Buy if the stock’s price goes above $250”, or “Sell if the stock’s price falls below $230”). PersonalFinanceLab supports Limit Orders, Stop Orders, and the most advanced of these – the Trailing Stop order.

With a Trailing Stop order, you can specify a dollar amount or percentage, and your “order” follows that direction – and moves with the stock’s price.

Examples

The most appropriate example with a Trailing Stop order for personal investing is a Trailing Stop Sell Order.

Let’s say you buy a stock in your portfolio that you expect to grow a lot in the next year or so. But there is still risk – and you want to make sure you “lock in” any gains before the stock’s price falls more than 10%.

In this case, you would use a 10% Trailing Stop Sell order, and leave the order open until you cancel it. What this means is that the stock will stay in your portfolio until it drops more than 10% of its peak price since you bought it – then it will sell automatically.

So if you buy a stock at $100 and its price doubles to $200 while you own it, placing a 10% trailing stop will cause the stock to sell when its price falls below $180 (10% drop from its peak price) – locking in your gains.

This is an important concept for long-term investing: we don’t want to teach students that they need to be watching their portfolio like a hawk, but we do want to teach about protecting against risk, and trailing stop orders are an excellent way to protect against price drops without being an investing fanatic.

Teach your students to put in their Trailing Stop Sell orders as soon as they buy a stock, and set them up for a healthy financial future.

Happy Trading!

-The PFinLab Team.