Intro to Stock Trading

One thing to consider: If you're planning on holding a particular investment for an extended period of time because you believe its long-term potential is substantial or that it is undervalued, placing a trailing stop order may not be a sensible course of action. As an asset class, stocks are notorious for their collective and individual volatility; the road is certainly bumpy. Yet, you may not be able to profit from your convictions because your trailing stop orders could be triggered as a result of ordinary volatility. If you have any doubts or questions, consult your financial adviser.

Bracketed Orders

Bracketed orders go one step further than trailing stop orders. Just like the latter, you set a trailing stop as either a percentage or fixed spread (recall that on the previous page, our trailing stop was $2 for Hershey). In addition, however, you can establish an upper limit that, when reached, will result in the stock being sold.

Going back to our Hershey Chocolate example, let’s now assume you placed a bracketed order with a trailing stop level of $2 per share and an upper limit of $65 per share. The bracketed order will behave exactly the same as the trailing stop order, with the $2 trailing stop automatically ratcheting up as the price increases. The difference? When and if Hershey hits $65, the bracketed order will automatically convert into a market order and should be immediately executed by your broker.