Trailing Stop Order
A trailing stop or virtual trailing stop order (VTSO) is a stop order that adjusts according to the price movements of the security. The actual stop price, which is usually a percentage amount above or below the price of the security, is placed at a set distance above or below the the market price depending on whether the VTSO is a long or short position. Unlike an ordinary stop loss order, a VTSO allows the stop price to move from its starting price as the price of the security changes.
A diagram showing an example of VTSO on a long position is provided:
The advantage of a VTSO in the case of a long position is that it allows the stock price to appreciate while simultaneously adjusting the stop price so that potential losses from a price decrease would be minimized to the adjusted stop price. In other words, as the price of the security increases, the stop price adjusts upwards while maintaining the set percentage distance from the market price. As soon as the price of the security begins to decrease, the stop loss maintains its price to protect the long position and minimize its potential losses to the adjusted stop price.
A VTSO on a short position allows the investor or trader to cover a short position when it reaches the stop loss price. As the price of the security decreases, the stop loss price will correspondingly decrease with a set distance from the market price. When the market price increases and threatens the short position, the stop loss price would hold its place until the price of the security reaches the stop loss or resumes decreasing.