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 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 >>
  2. 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 >>
  3. 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 >>
  4. What are the rules for placing stop and limit orders in forex?

    The high amounts of leverage commonly found in the forex market can offer investors the potential to make big gains, but ... Read Answer >>
  5. What types of investors are best-suited for stop loss orders?

    Use a stop-loss order to mitigate downside risk. Whether you are a conservative beginner or a seasoned day trader, a stop ... Read Answer >>
  6. Is it better practice to use a stop order or a limit order?

    Discover whether it is considered best practice to use stop losses or limit orders. Both options have their advantages and ... Read Answer >>
Related Articles
  1. Options & Futures

    Protect Yourself From Market Loss

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

    Trailing-Stop/Stop-Loss Combo Leads To Winning Trades

    Combine trailing stops with stop-loss orders to reduce risk and protect portfolio value.
  3. Investing Basics

    Stop Loss Order Strategy

    A stop loss order is an order placed with a broker to sell a stock immediately if it drops to a certain price. It's a common way for investors to protect themselves from the possibility of a ...
  4. Options & Futures

    Maximize Profits With Volatility Stops

    Find out which type of volatility stop fits your trading objectives.
  5. Investing

    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.
  6. Trading Strategies

    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.
  7. Options & Futures

    A Logical Method Of Stop Placement

    If holding on to losing trades is human nature, this tool will help protect you from yourself.
  8. Options & Futures

    Increase Your Profits With Soft Or Mental Stops

    A soft stop provides a trader with added flexibility, allowing him to react to ongoing changes in the market.
  9. Trading Strategies

    How to Use Trailing Stops

    A trailing stop is an order to buy or sell a security if it moves in an unfavorable direction.
  10. Active Trading Fundamentals

    The Stop-Loss Order - Make Sure You Use It

    It's a simple but powerful tool to help you implement your stock-investment strategy. Find out how.
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 Order

    An order to buy or sell a security when its price surpasses a ...
  4. Stop Hunting

    A strategy that attempts to force some market participants out ...
  5. Soft Stop Order

    A mental price or percentage set by traders where they will place ...
  6. Stopped Out

    The execution of a stop-loss order. Stopped out refers to when ...
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center