Ask a Broker

ISSUE 310 | NOV 2004

Q: What is a “trailing stop” order? How do I use one? -Confused.

Lind Plus Senior Market Strategist Dominic Boyle answers:

A: A trailing stop is designed to either limit losses or take profits if a market moves favorably with a current position. For example: If you are currently short one December Treasury bond futures contract from 113-00 and have a buy stop in place at 113-16, you can instruct your broker to move your buy stop down to 112-24 and attempt to lock in some profits not including any slippage you may receive. This would be correct utilization of a trailing stop. If the market continued to move in your direction you may further instruct your broker to move your stop down on a trailing basis. Trailing stops are important because they allow you to lock in profits and trade with market momentum as opposed to against it. Many times traders will have profits but watch them disappear because they think they can “watch” the market. The most logical approach to trading is to let the market determine when you should be out, and when momentum moves to your trailing stop you cover, take profits or limit losses.

The most common approach to using a trailing stop is moving the stop in increments consistent with the first change in stop price, without getting ridiculous and giving the market some room to breathe. For example: if you are currently short bonds from 113-00 and have a buy stop at 113-16, you may instruct your broker to move your buy stop eight ticks lower every time the market moves eight ticks in your direction. A trailing stop is used to follow the market in a way that lets you catch a larger move as opposed to day trading or moving a stop on a tick-by-tick basis. Moving a stop every time a market moves one or two ticks in your direction would be excessive and would likely be discouraged.

*A “trailing stop” would be considered a contingent order and can be taken on a “not-held” basis from your preferred Lind Plus broker. Contact a Lind Plus Market Strategist, call 800-571-1122 or email lindplus@lind-waldock.com.

Kristina Zurla Landgraf is editor of LindForum. She can be reached at editor@lind-waldock.com. To submit a question for Ask A Broker, contact the editor at that address.

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