What is: Trailing Stop

What is Trailing Stop?

Trailing Stop is a type of stop-loss order that moves with the market price of an asset. It is designed to protect profits by allowing a trade to remain open and continue to profit as long as the market price moves in a favorable direction.

How does Trailing Stop work?

When a Trailing Stop is set, it will follow the market price at a specified distance, such as a percentage or a fixed amount. If the market price moves in a favorable direction, the Trailing Stop will move along with it, locking in profits. However, if the market price reverses and moves against the trade, the Trailing Stop will trigger a market order to close the trade at the best available price.

Benefits of using Trailing Stop

One of the main benefits of using a Trailing Stop is that it allows traders to protect their profits without having to constantly monitor the market. It also helps traders to avoid emotional decision-making by automatically closing a trade when the market price moves against them.

How to set up a Trailing Stop

To set up a Trailing Stop, traders can usually do so through their trading platform by selecting the option to add a stop-loss order and choosing the Trailing Stop option. Traders can then specify the distance at which they want the Trailing Stop to follow the market price.

Examples of Trailing Stop in action

For example, if a trader buys a stock at $50 and sets a Trailing Stop at 10%, the Trailing Stop will move along with the market price. If the stock price rises to $55, the Trailing Stop will move up to $49.50. However, if the stock price then drops to $52.50, the Trailing Stop will trigger a market order to close the trade at the best available price.

Considerations when using Trailing Stop

It is important for traders to consider the volatility of the market and the specific characteristics of the asset they are trading when using a Trailing Stop. Additionally, traders should regularly review and adjust their Trailing Stop settings to ensure they are effectively protecting their profits.

Conclusion

In conclusion, Trailing Stop is a powerful tool that can help traders protect their profits and minimize losses in the market. By understanding how Trailing Stop works and how to effectively use it, traders can improve their trading strategies and achieve greater success in the financial markets.