A trailing stop loss is a dynamic order type that moves in tandem with the market price of an asset. Unlike a standard stop loss order, which stays at a fixed price, a trailing stop adjusts automatically as the position moves in a favorable direction. If the price of the asset rises, the trailing stop follows it at a predetermined distance, usually defined by a fixed dollar amount or a percentage.
For example, if you purchase a stock at $100 and set a 5% trailing stop, the initial stop price is $95. If the stock price climbs to $110, the trailing stop automatically adjusts to $104.50, which is 5% below the new high. If the stock price then drops to $104.50, the order triggers and sells the position to lock in gains or limit losses. If the price never hits the trailing stop, the order remains active.
This tool helps traders protect profits while allowing a trade room to grow. However, trading involves significant risk. Market volatility can cause slippage, meaning the final execution price may differ from the trigger price. Always assess your risk tolerance before using automated order types.
How this answer was produced
AI-assisted draft, human-reviewed by AlphaScala editorial against our standards before publication. General education, not advice for your specific situation.