August 12, 2008 | posted by Pam Atherton in Investments |

Selftrade is the latest online broker to offer trailing stops - a share trading tool that offers a way to lock in profits in volatile markets.

Whereas with a traditional stop-loss, shares are sold if they fall to a fixed level, with a trailing stop, this trigger price ratchets up if a share rises.

The share is then automatically sold if the price falls back from its high by the specified margin - say, 5 per cent.

So if a share spikes up, but then reverses, you can get out with much of your initial profit still  intact. If, however, the price keeps rising, you stay invested.

As with its fixed stop-loss and similar limit orders, Selftrade is offering trailing stops to its clients at no extra cost to its normal, flat rate, dealing charge of £12.50.  The mechanism can be set up at current market prices or activated only if a share rises to a certain level of by a certain amount.

Stop-loss and limit orders are useful for locking into prices without having to continually monitor markets. Such orders can allow you to take advantage of short-term volatility - to pick up shares at a lower price or to sell at a higher price

But at times of high volatility, as now, a fixed stop-loss can quickly lose touch with market prices and therefore offers less protection.

A trailing stop, by contrast, makes it easier for you to capture upward momentum and protect profits. For instance, you could lock in short-term price rises in certain shares on the back of bid rumours.

Selftrade head of research, Stephen Barber, says: “Clearly, stop-losses, whether fixed or trailing, are particilarly useful for sophisticated investors in volatile markets but investors need to consider the likely behaviour of a share before setting a stop loss.”

Although many online brokers offer fixed stop-losses and limit orders, trailing stops are less common.  Others offering the facility include Barclays Stockbrokers.

For more visit the Defaqto Sharedealing centre:
http://www.defaqto.com/consumer/investments/share-dealing.aspx
http://www.selftrade.co.uk/services/personal-dealing/dealing-account.php
http://www.stockbrokers.barclays.co.uk/?

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