A trailing stop order is a dynamic risk management tool that allows an investor to set a stop loss at a fixed percentage or dollar amount below the current market price. Unlike a standard stop loss order, which remains at a static price level, a trailing stop adjusts automatically as the asset price moves in a favorable direction.
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 rises to $110, the trailing stop automatically adjusts to $104.50. If the stock then drops by 5% from that new high, the order triggers a market sell to protect profits or limit losses. If the stock price declines, the stop price remains fixed at its last adjusted level.
This order type helps traders lock in gains while allowing a position to run during positive trends. However, trailing stops do not guarantee execution at a specific price, especially during periods of high market volatility or rapid price gaps. Trading involves significant risk, and investors can lose more than their initial investment. Always consider liquidity and market conditions before placing orders.
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.