syndu | Jan. 8, 2024, 1:45 p.m.
A trailing stop loss is a type of stop loss order that moves with the market price. It's designed to protect gains by enabling a trade to remain open and continue to profit as long as the price is moving in a favorable direction, but closes the trade if the market price changes direction by a specified distance.
For example, if you own a stock that's currently priced at $100 and you set a trailing stop loss order with a $5 trail, the stop loss order will be at $95. If the stock price rises to $105, the trailing stop loss will move up to $100. If the stock price then falls to $100, the trailing stop loss order would be triggered, and the stock would be sold to protect your gains.
The key advantage of a trailing stop loss is that it allows traders to specify the amount they are willing to lose without setting a limit on the potential profit.
It's particularly useful in volatile markets where prices fluctuate widely.