Trailing Stop
Order TypesQuick Definition
A stop loss order that moves with favorable price movement to lock in profits.
Detailed Explanation
A trailing stop is a dynamic stop loss that adjusts automatically as price moves in your favor, protecting profits while allowing positions to run. It can be set as a fixed dollar amount, percentage, or based on technical indicators like ATR. As price rises (for longs), the stop rises but never decreases. If price reverses by the trailing amount, the position closes. Trailing stops help traders capture trends without predicting exact tops or bottoms. However, they can result in premature exits during normal retracements. Proper trailing stop distance balances protecting profits with giving trades room to breathe.
Real Trading Example
Setting a 5% trailing stop on a stock bought at $100 that rises to $120 would place the stop at $114 (5% below $120).