How to Use Trailing Stop on ETRADE

A trailing stop is a dynamic tool for investors looking to protect their gains while still allowing for potential upside in a trade. On ETRADE, utilizing trailing stops can be a powerful strategy to lock in profits as a stock's price increases, while also providing a safety net to limit potential losses. This article will guide you through the process of setting up and using trailing stops on E*TRADE, offering practical tips and detailed instructions to help you make the most of this feature.

Understanding Trailing Stops

A trailing stop is a type of stop order that moves with the market price. Unlike a traditional stop order, which is fixed at a specific price, a trailing stop adjusts automatically as the price of a stock moves in your favor. The primary benefit of a trailing stop is its ability to protect gains by selling a stock if its price falls by a certain percentage or amount from its highest point since the order was set.

How Trailing Stops Work

When you set a trailing stop, you specify either a trailing stop amount or a trailing stop percentage. For instance, if you set a trailing stop at 10%, the stop price will adjust up with the market price. If the stock price increases, the stop price rises accordingly, but if the stock price drops, the stop price remains at its highest level reached, triggering a sell order if the price falls back to this level.

Setting Up a Trailing Stop on E*TRADE

1. Log In to Your E*TRADE Account Begin by logging into your E*TRADE account. If you don't have one, you will need to open an account and complete the necessary steps before you can set up a trailing stop order.

2. Navigate to the Trading Section Once logged in, go to the "Trading" tab on the E*TRADE platform. This will take you to the area where you can enter new orders.

3. Select the Stock You Want to Trade Choose the stock you wish to apply the trailing stop to. You can do this by entering the stock's ticker symbol in the search bar and selecting it from the search results.

4. Choose the Order Type In the order entry section, select "Trailing Stop" as your order type. You will then have the option to set either a trailing stop amount or a trailing stop percentage.

5. Specify the Trailing Amount or Percentage Enter the amount or percentage by which you want the stop price to trail the stock's market price. For example, if you select a trailing stop of 5%, the stop price will adjust up as the stock price increases, but if the stock price decreases by 5% from its highest price, the order will be triggered.

6. Review and Confirm the Order Before finalizing, review your order details to ensure everything is correct. Once you're satisfied, confirm the order. Your trailing stop will now be active and will adjust automatically according to the parameters you set.

Tips for Using Trailing Stops Effectively

• Choose the Right Trailing Amount or Percentage: The trailing amount or percentage you set should reflect your risk tolerance and investment goals. A tighter trailing stop may lock in gains more quickly but can also be triggered by short-term fluctuations. Conversely, a wider trailing stop may give the stock more room to fluctuate but could expose you to greater losses.

• Monitor Your Trades Regularly: Even though trailing stops help automate the selling process, it's still important to monitor your trades and adjust your trailing stops as needed based on market conditions.

• Use Trailing Stops in Conjunction with Other Strategies: Trailing stops can be a useful part of a broader trading strategy. Consider combining them with other technical indicators or analysis to make more informed decisions.

• Understand Market Conditions: Market volatility can impact the effectiveness of trailing stops. Be aware of market conditions and adjust your trailing stops accordingly to manage risk effectively.

Examples and Scenarios

Let's consider two scenarios to illustrate how trailing stops can work in practice:

1. Scenario 1: Stock Price Rises and Falls

   • You purchase a stock at $50 and set a trailing stop of 10%.
   • The stock price rises to $60. Your trailing stop adjusts to $54 (10% below $60).
   • If the stock price then falls to $54, the trailing stop triggers a sell order, locking in a profit of $4 per share.

2. Scenario 2: Stock Price Rises Continuously

   • You set a trailing stop percentage of 5% on a stock bought at $100.
   • As the stock price rises to $120, the trailing stop adjusts to $114.
   • If the stock price continues to rise, the trailing stop will keep adjusting upward. If the stock price then drops to $114, the trailing stop will trigger a sell order, securing the gains.

Conclusion

Using trailing stops on E*TRADE can be an effective way to manage risk and lock in profits as market conditions change. By understanding how trailing stops work and following the steps to set them up, you can take advantage of this tool to enhance your trading strategy. Remember to consider your risk tolerance, monitor your trades, and adjust your trailing stops as necessary to align with your investment goals.