When placing a trailing stop...?

Question

When placing a trailing stop on Schwab.com's trader device, it says that the trailing stop should be more than the stop loss order.

This confuses me. I thought trailing stops were meant to keep you safe from gaps by selling when the momentum is pushing your stock in the wrong direction. Ex: the stop loss order is set for $8, and you bought it at $10, but that day the stock dropped from $15 to $9. If you had a trailing stop of 5% I thought it would sell at $14.25, rather than waiting for your stop loss order to kick in at $8.

Am I wrong? or is Schwab?

Answer 1

Well your right theoretically in the respect that if your stock goes to $15, then it should sell at 14.25 with a 5% trailing stop.

Remember, trailing stops are designed to keep profit you already made, but its never guaranteed you will ever make profit at all.

But it does have to be lower than the stop loss order because the stock is never guaranteed to go up to $15, in fact it can start to tank immediately after you buy it.

If you bought it at $10 dollars with a trailing stop of 5% then the stock would sell at $9.50 (if the stock tanked as soon as you bought it, which happens occasionally). That is $1.50 higher than your stop loss order.

In other words, if you have a 5% trailing stop on a $10 stock then there is no sense in having a stop loss at $8, because it will never hit that mark.

You can raise the stop loss to a higher number (say $9.00) and raise your trailing loss to 11%, in which case you would cover the requirements of the system. Or you could change it in a number of ways, just as long as trailing stop is more than the stop loss of your initial investment price.

Hope this explains it, feel free to ask for additional explanation.

Answer 2

A stop or a trailing stop turns into a market order once the criteria is met.  If the stock is gapping down... you'll get the best price avaiable, after the gap. Neither Schwab or anyone else will guarantee any type of stop. To think so.... reveals a need to increase your understanding of investing/trading before you find other surprises!!!!!!  

Think about what you've asked here..... You have a car..... you offer to sell it for $10,000.   You have a crash... no insurance & $3000 in damage....... if someone was considering buying your car at $10,000.... with the damage it vwould be time to renegotiate.  Stock moves by supply & demand.... by perception of both.

Good investors & traders read all the time. I'm a trader. I read a new trading book every six weeks or I re-read one I've read before.  Knowledge is the only way to succeed in investing. Anything else is simply gambling.