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Trailing Stop Definition and Uses
What Is a Trailing Stop?
A trailing stop is a modification of a typical stop order that can be set at a defined percentage or dollar amount away from a security’s current market price.
- For a long position, an investor places a trailing stop loss below the current market price.
- For a short position, an investor places the trailing stop above the current market price.
A trailing stop is designed to protect gains by enabling a trade to remain open and continue to profit as long as the price is moving in the investor’s favour.
The order closes the trade if the price changes direction by a specified percentage or dollar amount.
A trailing stop is typically placed at the same time the initial trade is placed, although it may also be placed after the trade.
Understanding a Trailing Stop
Trailing stops only move in one direction because they are designed to lock in profit or limit losses.
If a 10% trailing stop loss is added to a long position, a sell trade will be issued if the price drops…
