A:

A virtual trailing stop order (VTSO), is a stop order that adjusts as the price of a security moves. The stop price is placed at a set distance above or below the market price depending on whether it is on a long or short position. The stop price then adjusts as the price of the security moves, maintaining the set distance. The purpose of this order is to maintain a set level of potential loss at any point in time while allowing for continued appreciation as long as the price does not fall to the stop loss.

In the case of a VTSO order on a long position (as shown in the image below), the VTSO is an order to sell the security when it reaches the stop loss price target that is a set distance (usually a percent amount) below the price of the security when the VTSO order is placed. As the security's price increases, so does the stop loss amount but if the price falls, the stop loss price remains in place. For example, if you buy a stock at $50 per share and place a VTSO to protect it at a 10% loss, the stop loss order is set at $45 to start. If the shares rise to $60, the stop loss price adjusts upward to $54, which is 10% below the current market price of $60. If the price falls back down to $54 from $60, the stop loss order will turn into a sell order and the position will be sold.

vtso1.gif

In the case of a VTSO order on a short position, the VTSO is an order to cover a short position when it reaches the stop loss price. As the security's price decreases, the stop loss will move down with it. The stop loss price will remain at the same level when the security moves upward.

To learn more, see Trailing-Stop Techniques.

RELATED FAQS
  1. What is the difference between a buy limit and a stop order?

    Learn the difference between buy limit orders and stop orders, including stop loss orders, and understand the risks of the ... Read Answer >>
  2. What does "gather in the stops" mean?

    "Gather in the stops" is a trading strategy used by investors to trigger stop orders already in place so that the price of ... Read Answer >>
  3. What is the difference between a stop order and a stop limit order?

    Learn the differences between a stop order and a stop limit order. Traders use these as stop losses and regular investors ... Read Answer >>
  4. Are stop orders only used for stocks?

    Learn about sell-stop and buy-stop orders, when and how to use stop orders and what other securities stop orders could be ... Read Answer >>
  5. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Answer >>
  6. What is the difference between a stop and a market order?

    Learn about market orders and stop orders, how they are used and executed, and the main difference between stop orders and ... Read Answer >>
Related Articles
  1. Investing

    Protect Yourself From Market Loss

    There are several simple strategies you can use to protect yourself from downside risk.
  2. Trading

    Maximize Profits With Volatility Stops

    Find out which type of volatility stop fits your trading objectives.
  3. Trading

    How To Start Trading: Order Types

    The types of orders you use can have a large effect on your trading performance, so understanding the different order types is important to your success.
  4. Trading

    Three Types Of Profit Protection Stops

    Three types of profit protection stops lock in profits at different stages in the progression of a successful trade.
  5. Trading

    A Logical Method Of Stop Placement

    If holding on to losing trades is human nature, this tool will help protect you from yourself.
  6. Investing

    Mastering Stop Placement

    Place the stop loss where, if hit, the reasons you took the trade are no longer valid.
  7. Trading

    Manage Risk With Trailing Stops And Protective Put Options

    Using the right strategy can lower the risk of failure and protect your profits.
  8. Managing Wealth

    Narrow Your Range With Stop-Limit Orders

    With stop-limit orders, buyers protect themselves from prices too high for their tastes.
  9. Trading

    Forget The Stop, You've Got Options

    Using options instead of stop-loss orders adds finesse and control in limiting losses.
  10. Trading

    Stop Hunting With The Big Forex Players

    Learn to bank short-term profits by placing stops away from the crowd.
RELATED TERMS
  1. Trailing Stop

    A stop order that can be set at a defined percentage away from ...
  2. Hard Stop

    A price level that, if reached, will trigger an order to sell ...
  3. Stop Hunting

    A strategy that attempts to force some market participants out ...
  4. Gather In The Stops

    A trading strategy of driving down a stock's price by selling ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop ...
  6. Stopped Order

    A market order on the NYSE that is stopped from being executed ...
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center