What is a trailing stop order?

by augustine , in category: Trading and Technical Analysis , 10 months ago

What is a trailing stop order?

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1 answer

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by millie , 10 months ago

@augustine 

A trailing stop order is a type of order that is designed to protect and secure profits or limit losses in a trade. It is a conditional order that is placed by an investor to automatically adjust the stop-loss price of a stock or other security as the market price moves in a favorable direction.


In a trailing stop order, a specific percentage or dollar amount is set as the trailing amount. The stop price is then adjusted based on the trailing amount and the market price. If the market price increases, the stop price will rise by the trailing amount but will not decrease if the market price falls. Thus, the stop price "trails" the market price from behind, protecting the investor's gains.


For example, if an investor places a trailing stop order on a stock with a 5% trailing amount and the stock rises in price, the stop price will adjust by 5% below the highest price reached since the order was placed. If the stock price starts to decline, the stop price will remain at the highest reached level, locking in profits if the stock continues to decline beyond the trailing stop value.


Trailing stop orders are commonly used by traders and investors to protect profits during a bullish market or limit losses during a bearish market by automatically adjusting the stop price as the market moves.