A trailing stop loss is an advanced order type used in trading to manage risk and maximize potential profits. Unlike a standard stop loss that is fixed at a specific price level, a trailing stop order adjusts automatically as the market price moves in a favorable direction for the trader.
How It Works:
• When a trader sets a trailing stop order, it automatically adjusts the stop-loss level at a specified distance from the current market price.
• If the market moves in favor of the trade, the trailing stop loss follows, maintaining the set distance.
• If the market reverses and moves against the trade, the trailing stop stays in place or triggers at a more favorable level, locking in potential profits.
Advantages:
• Protects Profits: Automatically adjusts to market movements, helping secure profits.
• Limits Losses: Allows traders to benefit from price increases while limiting losses if the market reverses.
• Reduces Monitoring: Eliminates the need for constant monitoring, making it ideal when you cannot actively watch the market.
When It’s Used:
• Often used in volatile markets or with strategies aiming for large price movements.
• Available across various trading platforms for financial instruments like stocks, forex, and commodities.
• A powerful tool for managing risk and optimizing outcomes by securing gains and allowing for growth in profitable trades.