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.
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.
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