Hello, traders.
I'm Mike Obucina, Senior Content Producer here TD Ameritrade.
And in this video, I'm going to show you
how to place trail stop orders on the Thinkorswim desktop
platform.
We're going to show you a few different examples,
starting with how to do a trail stop based off of $1 offset.
Second, we'll do one with a percentage offset.
And third, I'll show you how to do a value or tick offset
using a futures contract.
And finally at the end, we're going
to talk a little bit about trail stop limit
orders, which differ slightly from a trail stop market order.
So stick around and check that out.
For now let's jump in and get started.
OK, to get started, I'm going to show you
how to place a trail stop order on shares of stock
that you already own in your account.
Now in our demonstration account here, we
have 100 shares of Starbucks.
I'm going to use that as our example.
We bought the stock at 81.07.
Stock currently trading 85.68.
So we have an unrealized profit of about $461.
Now let's imagine we want to start our trail step $2
below the current trading price.
To get started, we're going to right click on the position,
hover over create closing order, and we're
going to select with stop.
You can see below in our order entry tools a sell stop
order has been cued up by default.
This is just a standard stop order.
So we do have to make some modifications here.
To do that, we're going to go to the order type
and change it from stop to trail stop.
Now before I select this, I want you to notice the price column.
By default on a stop order is set to a price
level, $1 below the current trading price.
The link column, there's nothing in there.
I want you to keep an eye on this.
Now as I switch this from stop to trail stop,
you can see that two things have changed.
We no longer see a price in the price column.
Instead, we see by default a minus $0.10 offset.
And then in the link column we have a selection.
By default it's set to the mark price.
You can change this.
And you would change us on a number
of different factors, which we'll explain in a second.
But if we use the mark price to price our trail stop,
what this is essentially doing is
it will take the mark price, which is halfway
between the bid and the ask of the security you're trading.
And depending on your offset, it will calculate your trail stop
price.
Now we said we want to do a $2 trail stop.
So when I type in minus two, hit Enter on my keyboard.
And now we have that $2 trail stop offset selected.
And when we hit confirm and send,
whatever the mark price is, once again, halfway
between the bid and the ask, it's
going to subtract $2 from that, and that
will be our starting trail stop price for this order.
Now, why would you use something besides mark price?
Maybe you want to use the bid price, or the ask price,
or the last price.
Well, it really comes down to the stock your trading.
If it's a liquid stock, meaning there's many shares traded,
and it has a tight bid ask spread.
In this case, Starbucks is generally speaking,
$0.01 to $0.02 wide an it's bid ask.
There's really no issue using the mark price
to calculate that.
But if you had a stock with a really wide bid
ask spread, maybe a $1 or $2 wide bid ask spread.
Maybe you're trading a smaller stock,
it's a little less liquid.
Then pricing your trail stop off that mark price may not
be the smartest thing.
Because, the width of that spread
could put your trail stop within the bid
ask spread, automatically triggering your order.
So be very careful when you're using trail stops
on stocks that aren't liquid.
So that is essentially what this function will allow you to do,
is determine what that trail price will be priced off of.
Now, the last thing we want to do
is we're going to change this from a day order
to good till cancel.
Because, maybe today Starbucks doesn't sell off $2,
and we want this working for more than one trading session.
So once I'm ready to go, I'm going to hit confirm and send.
Can review the order one last time, hit send.
OK let's go over to the monitor tab now.
And you can see it under working orders,
here is our trail stop order.
The software has calculated the mark price.
When we hit confirm and send, it subtracted $2 to create
our starting trail stop price of $83.70.
Now, you can see the mark is just
$0.02 below where it was when it calculated this trail stop.
If we see this mark go to 85.71, you
will see this trail stop move to 83.71.
And every penny it continues to climb
after that, this trail stop will automatically change with it.
Now, you can see the mark has gone below 85.70.
So our trail stop is staying still.
It's not going anywhere.
And that's how a trail stops works.
If the stock goes down, your stock price stays the same.
If the stock goes up from the initial mark
price of when you put it in, then it will continue to climb.
Each tick it goes up with the stock.
And there you can see, the stock has now gone above our original
mark price of $85.70.
It's now trading at 85.72.
And as it continues to climb, you
can see our trail stop is automatically moving.
It started at 83.70, it has now gone up $0.05.
So as the stock continues to climb,
so will that distance between the stock and the trail
stop price.
So if the stock does go down from here,
we've now locked in potentially another $0.05 of profit
on the stock.
So that's how a trail stop works and that's
how the software calculates it.
And it automatically works in the background.
There's nothing you really need to do to adjust that price,
unless you want to cancel the trail stop
and start with a new trail amount.
OK.
For our next example, I'm going to show you
how to do a trail stop.
But instead of dollar amount, we're
going to use a percentage amount.
And for this example, I'm going to use our shares
of McDonald's.
We have 16 shares, we bought at 177.60.
Stock has gone up significantly, up to $220 and change here.
We have a potential profit of $690
that we haven't realized yet.
Now, with this example let's do a trail stop 10%
below the current price.
So to get started, we're going to right click on our position.
Hover over, create closing order,
and select, with stop, again.
This time we'll also change us to trail stop.
Now the difference is, instead of putting a dollar offset,
I'm going to click this little icon next to our price field
until we get to the percentage icon.
Now you can see we have a percentage offset.
I'm still going to do this off the mark price.
Because once again, McDonald's is a very liquid stock.
Very tight bid ask spread, so no worries there.
And I'm going to type in minus 10%.
Hit Enter on my keyboard, and change it to GTC.
We'll hit confirm and send.
And just like before, the software
will calculate our starting stop price.
But this time, instead of mark price minus dollar amount,
it took mark price minus 10% of the mark price value.
And it's subtracted that to create our starting trail stop
price of 198.77.
And just like our Starbucks example,
if the stock goes down, it will stay here.
If the stock goes up from our starting mark price that
was used in this calculation, you
will see the stock price automatically
tick up with the stock.
OK for our third example, I'm going
to show you how to do a trail stop using a tick offset.
Now, you're probably not going to use this with stock.
You can however.
But generally speaking, you're probably
only going to use this type of trail stop
if you're trading something like futures.
And for you non futures traders out there, just stick with me.
But if you trade futures and you want to do a tick offset,
here's how you'll do it.
To show this example, I'm going to go to the trade tab
and we're going to trade the S&P E-mini futures,
symbol forward slash ES.
Now brief primer on these futures,
they tick in quarters, not pennies like a stock.
So the prices are going to go from 50 to 75, to $1 even,
back to 75, to $1 even.
So they're ticking in quarter increments,
but because of the contract multiplier in terms,
necessarily how much notional value this contract controls,
each quarter tick in the S&P E-mini future equates
to $12.50.
So if, let's say you wanted to risk 20 ticks to make,
I don't know, 50 ticks, you would
be risking 20 ticks on the S&P.
And for one contract, we can quickly
do the math on what that is.
So 20 ticks would be $250.
And it's just as easy for us to create a tick offset
in our trail stop order.
So to do that, we're first going to right click
on the ask price.
Because we're going to buy this future.
We're going to hit, buy custom, select, with stop.
And we're going to change the order type once again
to trail stop.
And there is our standard dollar offset.
But remember, this 250 it doesn't really--
you have to know the contract value to understand
what this is worth.
And because we're doing 20 ticks,
we're doing essentially minus $5.
It would be a $5 move in the index.
But money wise, that would be $250.
So we're going to change this from plus or minus dollar,
to this little staircase.
And we're going to change this to minus 20.
And there's our minus 20 ticks.
And we're just going to change this opening order to a market
order so we can quickly see this fill.
I'm going to hit confirm and send.
And then you see we've been filled on our future.
Now, I actually want to go to the chart tab
and open up the Active Trader Ladder.
And you can see, there is our fill price of 33.32 even,
and there's our trail stop, 20 ticks below the market.
Now if S&P E-mini futures go above our initial opening
price, this trail stop will once again automatically
move with the market.
If the market goes down, it will stay on pat
at our original 20 tick offset.
And there you can see, as the market moved
above our initial fill price, our trail stop
has been moved from 27.25 to 27 and 1/2.
And as it continues to move up, so all the trails
stop, just like we saw in our stock positions and orders
that we did earlier in the video.
All right, finally you might be asking,
what about a trail stop limit?
Well , it's pretty much a similar process.
However, just a few caveats that I want to explain as we
do one of these.
So I'm going to use the Coca-Cola
shares as our example.
We have 66 shares, traded at 44.35.
Stocks at 50.34, So once again, we have an unrealized profit.
Let's right click.
We're going to hit, create closing order with stop.
And this time, instead of changing it to trail stop,
we're just going to select trail stop limit.
Now you'll notice that unlike our trail stop,
where this top column was set to mark,
and we can show you what that looks like again.
This essentially is creating a trail stop limit.
Now, what did we do in the first three examples?
Well we created trail stop market orders.
You can see the market denotation here
in all of our working orders.
What that means is, if any of our trail stop prices get hit,
a market order will be set to sell either our shares of stock
or close out our futures position.
Now, why is that important?
Well, a market order guarantees of fill.
However, you won't know what your actual fill price is
until the order been completed.
And in a fast market or in a liquid market,
your fill price could be lower and even substantially lower
than what your stock price is at.
So with trail stop market orders,
we're more concerned about getting out of the position.
We're less concerned about the exact price that we get out.
However, if we go back to our trail stop limit,
order you can see is when we select this order,
we now can select a desired price
that once our trail stop gets activated,
this price will be the limit price to sell our shares.
Now remember what a limit order is.
A limit order defines--
you say, I want to sell at this price or better.
Which means if the market's below your limit price,
you won't get a fill.
But you'll be guaranteed that if the market trades up
to and through that limit price, you'll
get a fill at your price or better.
Now if you're less concerned about getting out
of the position and you're more concerned
about the price you get out, you would utilize a trail stop
limit.
However, I would recommend making a few tweaks
as you set this up to ensure that you also get a fill,
assuming even if the market is slightly illiquid or even
a fast market at that moment.
And here's how you can do that.
We'll start with first off creating our trail stop amount.
So let's do the same thing.
We're going to do this--
and this time we'll just do $1 offset.
And now because Coca-Cola is a liquid stock,
once again, we're not necessarily
concerned about pricing our trail stop off
of any other value than the mark.
But, if you're trading an illiquid stock,
once again, be careful on how you create that trail stop.
Now, next we have to actually create our limit price
once this fills.
Now you might be asking yourself,
how am I going to know what price the stock's trading
at when my stock could be moving up
and this trail stop amount could be moving up?
That's a great question.
And honestly, it's one of the reasons
why you have to be very careful when you use a trail stop
limit.
So what you can do is, you can change this from a manual price
to the, say last price.
So what I mean by that is, once your trail stop gets triggered,
the last traded price at that moment,
you can then use to calculate the value of your limit order.
And to ensure that you at least get a fill on your limit order,
something that some traders like to do is they'll actually put
the limit price maybe $0.25 or $0.10,
whatever they feel comfortable with,
below the last traded price.
And what that will do is, let's imagine stock
is trading of 50.36.
Let's say the trail stop goes in at 49.36.
Well if you get triggered at 49.36,
the limit order will go in $0.25 below that, which essentially
will get you an automatic fill at the best price available.
And assuming that Coca-Cola isn't gapping down really fast,
we should get a fill at or near the trigger price
that initially triggered our trail stop.
We'll change this to good till cancelled.
Hit confirm and send.
And there you'll see there's our trail stop limit order.
And it's essentially doing the same thing
is are the trail stops.
It starts out at value.
If the stock goes up, this will go up with it.
If the stock goes down and this gets triggered,
a limit order will be triggered to sell our shares
and our limit price will be calculated off
of the last traded price when this stop order triggers,
minus $0.25.
And once again, you might be saying,
Mike why would I do that?
Why would I give up $0.25?
But remember, if you put in a limit order below the market,
you should get a fill at the best available bid price
or somewhere near there.
Because technically, you've put in a marketable limit order.
And your limit order would basically
go to the front of the line and hopefully you get a fair fill.
And once again, this is the trying
to do the best of both worlds.
We're trying to get a fill but also guarantee a price.
If the price gapped below that $0.25 cushion,
we still would be--
we still would have shares and we'd
have a limit order working above the current market.
So the bottom line is, if you want
to make sure you get out of a position,
utilize the trail stop.
If you're more worried about getting a fair price
and you're willing to sacrifice in actual fill
to make sure that you get filled at a certain price,
then you would use trail stop limit.
But just know that each order has its pros and cons.
And understand them both before you utilize them.
Thanks for watching the video.
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Thanks again for watching the video and happy trading.