Once triggered, the trailing stop order becomes a market order and the stock is sold at the next best available price. Learn how to use a trailing stop loss order and the effect this strategy may have on your investing or trading strategy. Put simply, a trailing stop order is a risk management technique where a trader sets their stop loss level to trail the current market price by a specified value or percentage. You decide that you don't want to lose more than 5% on your investment, but you want to be able to take advantage of any price increases. A trailing stop-loss is a way to automatically protect yourself from an investment 's downside while locking in the upside. You simply give your broker a stop loss order called a trailing stop, which is a percentage below the market price. If the stock rises above its lowest price by the trail or more, it triggers a buy market order. For example:[2] X Research source You purchase stock at $25. For example, you might tell your broker you want a trailing stop 10% below the market price. The trailing stop loss is a type of sell order that adjusts automatically to the moving value of the stock. A trailing stop loss order adjusts the stop price at a fixed percent or number of points below or above the market price of a stock.

For example, a trailing stop for a long trade (in this sense, selling an asset you have) would be a sell order and would be placed at a price that was below the trade entry. A trailing stop is initially placed in the same manner as a regular stop-loss order. The trailing stop-loss order adds in a dynamic component to overcome this hurdle.

With the trailing feature, the stop-loss order is no longer fixed, but rather trails the price by a certain amount (usually a set percentage) that you specify. In doing so, one of the key advantages of the trailing stop-loss order is that it allows you to lock in profits rather than hold on to a stock for too long only to see your profits … 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.

Most pertinently, the trailing stop loss order moves with the value of the stock when it rises. Understand how a trailing stop loss works. What Is a Trailing Stop Order? It’s an offshoot of the original stop-loss order. With a buy trailing stop order, the stop price follows, or “trails,” the lowest price of a stock by a trail that you set. A trailing stop order is just a stop order with a built-in trigger or trailing price. For example, you buy Company XYZ for $10.
The stock rises to $27.

Then, the stock will be purchased at the best price available. Unlike a stop order that has a specific, fixed activation price, a trailing stop order has a moving activation price based on a stop parameter.