Trailing stop orders are a special type of stop-loss order that trails with price fluctuations that come with the financial markets. Instead of being set at an absolute amount, the stop-loss price is at a certain percentage. If the price moves up, the stop-loss order moves up with the price. When the price stops rising, the trailing stop remains fixed at the new level that it was dragged to, enabling a trader to lock in more gains while minimizing losses.
While they may be beneficial during strong trends, they may lead to early exits if the market stalls and does a quick reversal before continuing in the main direction.
- A trailing stop is designed to lock in profits or limit losses as a trade moves favorably.
- It is especially important that during volatile times, a wider trailing stop is set.
- Trailing stops can be set as limit orders or market orders.