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. 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 >>
  2. 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 >>
  3. What's the difference between a stop and a limit order?

    A limit order is an order that sets the maximum or minimum at which you are willing to buy or sell a particular stock. With ... 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. How can I use a stop order to limit my losses on a long stock position?

    Learn about stop orders, different stop order types, and how to use stop-loss orders and stop-limit orders to limit losses ... Read Answer >>
  6. 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 >>
Related Articles
  1. Trading

    Protect Yourself From Market Loss

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

    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

    Understanding Buy Stop Orders

    A buy stop order is an order to buy a stock at a specific price above its current market price.
  4. Investing

    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. Trading

    Manage Risk With Trailing Stops And Protective Put Options

    Using the right strategy can lower the risk of failure and protect your profits.
  7. Trading

    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.
  8. Trading

    Forget The Stop, You've Got Options

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

    The Truth About Investing Using Stop Losses

    Stop losses are supposed to save you money when a stock's value falls, but they end up costing more.
RELATED TERMS
  1. Hard Stop

    A price level that, if reached, will trigger an order to sell ...
  2. Stop Order

    An order to buy or sell a security when its price surpasses a ...
  3. Bracketed Buy Order

    A buy order that is accompanied by a sell limit order above the ...
  4. Stop Hunting

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

    A trading strategy of driving down a stock's price by selling ...
  6. Stopped Order

    A market order on the NYSE that is stopped from being executed ...
Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  3. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  4. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
  5. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  6. Current Account

    The difference between a nation’s savings and its investment. The current account is defined as the sum of goods and services ...
Trading Center