What is a Trailing Stop Order?

A Trailing Stop Order is a dynamic type of stop-loss order used to automatically adjust the stop price as the market price moves in the trader's favor, thus locking in profits and limiting losses. The trailing stop order automatically "follows" the price as it moves favorably, and when the market price reverses and hits the stop price, the order will be triggered and executed.

Key Features of a Trailing Stop Order:

• Dynamic Adjustment: A trailing stop order automatically adjusts the stop price to remain at a certain distance or percentage from the market price. For example, if you set a trailing stop distance of 10 pips, the stop price will increase as the market price moves up, but it will not adjust downward if the market price declines.

• Fixed Stop Distance: You can set a fixed trailing stop distance, typically defined in pips or percentages. As the market price moves favorably, the stop price follows the market price upward. When the market price reverses and reaches the set stop price, the order is triggered and the position is closed.

• Locking in Profits: The main advantage of this order is the ability to lock in profits as the market price moves favorably. For example, if the trailing stop distance is set to 10 pips, and the market price rises from 1.1500 to 1.1600, the trailing stop price would adjust to 1.1590, thereby protecting the profits already gained.

• Protecting Against Losses: Trailing stop orders can also be used to protect against losses. If the market price fails to move favorably, the order will close the position automatically to limit losses.

• Setting the Order: When setting a trailing stop order, you typically specify a fixed trailing distance (in pips or percentage). Some brokers also offer dynamic trailing features, allowing for more flexible settings.

For example, let's say you buy a stock at an initial market price of $50 with a trailing stop distance of $2. If the stock price rises to $55, the trailing stop price will automatically adjust to $53. If the stock price then falls back and hits $53, the stop order will be triggered, and the stock will be sold at the current market price, locking in a profit between $50 and $53.

Trailing stop orders provide automatic adjustment during market fluctuations, helping traders stay flexible and protect profits during trend changes.