By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter 3/30/10

A stop-loss order is a type of sell order in which your targeted sell price is set at a fixed percentage or dollar amount below the market price. If the market price of your stock rises, the stop loss price rises proportionately, but if the stock price falls, the stop-loss price doesn't change. This technique allows you to set a limit on the maximum possible decline without setting a limit on the maximum possible gain, and without requiring paying attention to the investment on an ongoing basis.

You can give instructions to your broker online or over the phone using the same routine you use when placing regular buy or sell orders. Most brokers offer automatic trailing stops, but if your broker does not offer this type of order, you can raise the stop on a daily basis as the stock rises in price.

Here's how you might use a trailing stop-loss order:
If you own a stock and decide to place a trailing stop-loss order, you can enter a sell order with a trailing stop loss of any dollar or percentage amount that you wish. For this example, we’ll use a stock that is currently priced at 141 and a trailing stop of 7.00.  

What this means is that if your stock falls by 7.00 from the price at the time you place the stop-loss order (in this case, 141), your order will be triggered and your stock will be sold (at 134). And if your stock climbs to 144.00, your stop loss, since it is trailing, will automatically be raised to 137.00 (144.00 less 7.00). 
 
Should your stock continue to increase in price, your trailing stop price will automatically be increased (and your profit will automatically increase, too). But sooner or later, your stock will fall 7.00 from its highest price (since your order was placed) and your shares will be sold. 

Click here for information on Roy's Cabot Benjamin Graham Value Letter.

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