You bought a stock at $150. It is now trading at $180, putting you up 20%.
Every trader faces this question: do you sell now and take the profit, or hold and hope it goes higher? Selling too early means missing potential gains. Holding too long means watching profits disappear.
There is a third option: lock in your profits while still giving the stock room to run.
The Problem with “Just Selling”
When a stock is up, selling feels like the safe choice. But here is what often happens:
- You sell at $180
- The stock keeps climbing to $220
- Your “locked” profit becomes a missed opportunity
On the flip side:
- You hold, hoping for more gains
- The stock drops back to $140
- Your 20% gain becomes a loss
Stop orders solve this dilemma by automating your exit strategy, removing emotion from the equation entirely.
Stop-Loss Order (Fixed Price Stop)
A stop-loss order triggers a market sell when the stock reaches a specific price. You decide in advance where you want to exit, and the order executes automatically.
Example:
- You purchased at $150, now trading at $180
- You place a stop-loss at $175
- Once the stock falls to $175, it sells at the next available market price
What happens:
- Stock climbs to $200? You remain invested, riding the gains
- Stock drops to $175? You sell automatically, locking in $25 per share profit
Advantages:
- Simple to understand and implement
- Guarantees execution at market price
- Eliminates emotional decision-making
Disadvantages:
- The stop price is fixed and does not rise with the stock
- If the stock climbs to $220 then falls back to $175, you still sell at $175
Trailing Stop Order (Follows the Price Up)
A trailing stop order automatically adjusts as the stock price rises. You set it as a dollar amount or percentage below the current price. As your stock grows, so does your protection.
Example (Dollar Amount):
- Stock at $180, you set a $5 trailing stop
- Stop price starts at $175
- Stock rises to $200, stop moves up to $195
- Stock drops to $195, it sells
Example (Percentage):
- Stock at $180, you set a 5% trailing stop
- Stop price starts at $171 (5% below current price)
- Stock rises to $200, stop moves to $190
- Stock drops 5%, it sells
What happens:
- The stop “trails” behind the price as it rises
- When the stock finally drops, you have locked in gains at the highest point
Advantages:
- Automatically captures more profit as the stock rises
- No need to manually adjust your stop
- Great for stocks with strong momentum
Disadvantages:
- Can be more complex to set up initially
- Normal volatility can trigger an early exit
- Does not protect against gap-downs when the stock opens below your stop
Which One Should You Use?
| Situation | Best Choice |
|---|---|
| Stock is volatile with large swings | Wider stop-loss (fixed) to avoid getting stopped out |
| Stock is trending strongly upward | Trailing stop to capture the run |
| You have a specific profit target | Fixed stop-loss just below your target |
| You are unsure how high it will go | Trailing stop lets winners run |
Real Example: My $150 to $180 Scenario
Let us say I purchased at $150, and the stock is now at $180:
Option 1: Fixed Stop-Loss at $175
- I am guaranteed at least $25 per share profit (16.7%)
- If it climbs to $220 and drops back, I still sell at $175
Option 2: Trailing Stop at $5
- If it climbs to $220, my stop sits at $215
- I would capture $65 per share profit (43%) instead of $25
The trailing stop wins in a strong uptrend. The fixed stop wins when the stock is choppy and you simply want to protect a specific gain.
Practical Tips for Setting Stops
Do not set stops too tight - Normal price movement can trigger a stop and sell you out of a winning position. Give your stock room to breathe.
Consider support levels - Set stops just below known support levels, not at round numbers where everyone else places theirs.
Account for overnight gaps - Stops do not protect against gaps. Your $175 stop might execute at $165 if the stock opens there.
Review and adjust regularly - For fixed stops, manually move them up as the stock rises to lock in more profit.
The Honest Truth
Stop orders are not perfect. They can:
- Get triggered by temporary dips, then the stock recovers without you
- Execute at worse prices than expected during volatile markets
- Provide a false sense of security against major market events
But they solve a real problem: removing emotion from selling decisions. When you set a stop, you have already made the decision. No more watching the screen, hoping, or panic selling at the worst moment.
What I Learned
I use trailing stops for stocks I believe have momentum. I use fixed stops when I have a specific profit I would be happy to lock in.
The key is having a plan before you need one. Set your stops when you are calm, not when the stock is crashing.
Your future self will thank you.