A stop loss by definition is a predetermined amount that you wish for a sale order to be placed on your behalf if the price of the underlying security drops to the amount you chose. This tool is particularly useful if you enjoy trading but are not able to watch the market when it is open. A stop loss is a trading tool commonly used by technical traders. Traders who follow chart patterns, graphs and use carefully plotted amounts to determine a direction a stock is going to move. A stop loss can be used by fundamental traders as well, but usually it is more of a mental threshold for how much they are willing to loose if their fundamental strategy is wrong. Stop losses can also be moved throughout the trade to lock in profits, but that is a manual process and if you are only able to login after the trading day is over you might miss out on some nice upward moves. For example on a volatile day your position could jump 5 to 10% intra day and then end up 2% at the close. Now this is a nice move up don’t get me wrong, but imagine if you saw your position up 10% at noon and were able to move your stop loss to a higher amount. Then when it sells off to settle up 2% you would have locked in a higher rate and then able to get back in the next day if you still favor that companies per share price to keep moving upwards.
A trailing stop loss proposes that an automated formula will move your stop loss up as your stock moves up wards and it will stay at the last up tick it moved to when the stock moves down it will stay at their until it is executed or the stock moves upward again . You can choose either a percentage or fixed dollar amount. You can also choose what the base your stop loss on, bid, ask or last price. Normally this complex trade would be placed at the market for stock trades. However you can use this type of trading on options orders as well and since they are less liquid then stock trades you might want to pick to base our stop loss on the bid or ask.