What is a VIRTUAL TRAILING STOP ORDER (VTSO)?
A complicated name for something that can actually make your life easier.
A virtual trailing stop order (VTSO) (for a sell order) is a trigger selling price that adjusts itself according to the price movement of a security. In other words, it says to your stock trading platform: “sell at market price if security XYZ falls by more than $Y from the highest price it reached since the order was entered”.
The main advantage of VTSOs is that they allow an investor to free himself from having to continuously watch a stock price in order to protect part of their gains if the security they own appreciates in value (or rises, increases, etc) , but then retreats.
The entry price for stock XYZ is $17. A sell VTSO is set to $1, which indicates to the system: “sell stock XYZ if its price falls by $1 from the highest price it will reach from the moment it is bought”.
The stock appreciates by $3 to reach $20, but falls thereafter. The VTSO is executed at $19, which protects most of the gains ($2 for that trade).
The blue dotted line shows that the gains would have only been $0 if the same investor would have set a “traditional” stop order (“sell security X if stock price falls below $17”) instead of a VTSO.
NB. This example use fictitious data for educational purposes. Your experience with VTSOs may differ.
Down market and short selling
A VTSO does not only protect gains, it can also protect an investor from increasingly important losses in a down market. In the example above, a VTSO would also have limited the losses to $1 if the stock price would have continuously fallen since the security was bought. A VTSO is a useful tool but does not guarantee that all trades will be profitable; they do not eliminate trading risks. Using VTSOs has to fit your investment strategy and investor profile.
The description and examples above are valid for sell orders (long positions). A buy VTSO can be setup to protect profits or limit losses for short orders, or simply to enter the market, but the logic is evidently inversed.
How to do it
Most brokers offer VTSOs. The example below show how to enter a 1$ price gap VTSO on the Disnat Classic platform.
NB. VTSOs are valid for a maximum of 30 days.
How much does it costs
VTSOs are charged only if they are executed and don’t cost more than typical equity trades.
This article was paid by Disnat, a division of Desjardins Securities. Desjardins Securities is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and a member of the Canadian Investor Protection Fund. This article was presented for general educational purposes only. Desjardins Online Brokerage Disnat, division of Desjardins Securities, will not be held responsible for errors or omissions in the presentation and reserves the right to modify and revise the contents of this document at all times and without advance notice. The economical and financial information, including market quotes, analysis and interpretations are offered for informational purposes only and should in no way be considered recommendations or advice to buy or sell a security. The information in this presentation should not be interpreted as legal, financial, accounting or tax advice. Disnat strongly recommends that you consults experts in those fields if necessary. The opinions, comments or approaches expressed in this presentation are those of the speakers and do not necessarily reflect the views of Disnat. Disnat, its administrators, managers, and employees will not be held responsible for damages, losses, or fees resulting from the content of or use of information contained in this document.