As an investor, avoiding big losses is at least as important as making profits. For example, if an initial investment of £1,000 falls in value to, say, just £500 – a 50% drop – you’ll need to double your money just to break even. Here’s where stop-loss orders come in.
A conventional stop-loss will simply ensure you get out of the market at a fixed price above or below your initial trading price. However, a trailing stop allows you to keep more of your profits.
For example, say you set a trailing stop at 25%, having bought shares for £10 each. The first trailing stop-loss kicks in at £7.50. If the share price then rises to £15, the new stop-loss level becomes £11.25, locking in a £1.25 minimum profit even if prices fall. Usually you’ll pay a broker a bit more for this type of trailing stop-loss order.