2. One can easily understand Trailing Stops by considering below example: Suppose one entered in a stock at 56 and now stock has moved to the level of Rs61 i.e. one is making a gain of Rs 5 per share and thus to protect this profit one can straightaway lift the stop loss and place it Rs 2 behind the prevailing price i.e. at Rs 59. Now even if the stock price falls an individual profit is protected as one is guided by the factor that the share price will go even higher and as a result one decides not to sell the shares at that time.
3. Placing Trailing Stops ensure that one is able to protect or lock in a portion of the unrealized profit on these shares in the event that the share price does in fact move back down.
4. The process involves cancelling the existing stop loss order of say Rs. 51 and place a new stop loss order at, say, Rs. 59. If the share price declines to Rs. 59 the shares will be sold and one is going to book profit of Rs 3 per share. If the price is in uptrend one can keep on shifting the stop loss in positive direction.
5. A point to be remembered about stop orders and trailing stops is that stop loss price should be sufficiently below the current market stock price to compensate for the normal intra-day price volatility of the particular stock. In case we keep it too close than one will see that positions will get squared or sold due to intraday volatility. Another point to consider in this aspect is that one is has to be watching the trading screen continously to be able to shift the stop loss.
