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. 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 >>
  4. 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 >>
  5. 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 >>
  6. How do I determine where to set my stop loss?

    Read about some theories on stop-loss placement and how traders use stop-loss orders to hedge against losses and capture ... Read Answer >>
Related Articles
  1. Trading

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

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

    Trailing-Stop/Stop-Loss Combo For Winning Trades

    Traders use stop-loss orders by setting the maximum they’re willing to lose. A trailing stop is similar.
  3. Investing

    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. Trading

    Maximize Profits With Volatility Stops

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

    A Logical Method Of Stop Placement

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

    The Stop Loss Order

    A stop loss order can protect an investor's portfolio when it is left unattended. Find out more about this market order and how it can work for you.
RELATED TERMS
  1. Hard Stop

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

    A buy order that is accompanied by a sell limit order above the ...
  3. Stopped Order

    A market order on the NYSE that is stopped from being executed ...
  4. Above The Market

    An order to buy or sell at a price set higher than the current ...
  5. Stopped Out

    The execution of a stop-loss order. Stopped out refers to when ...
  6. Stop Payment

    A request made to a financial institution to cancel a check or ...
Hot Definitions
  1. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  2. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  3. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  4. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  5. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
  6. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
Trading Center