A Trailing Stop is a type of order used in trading to limit losses and protect profits. It works by setting a stop loss at a certain percentage or dollar amount below the market price, and then adjusting the stop loss as the market price moves in the trader's favor.For example, if a trader buys a stock at $100 and sets a trailing stop loss at 5%, the stop loss will initially be set at $95. If the stock price then increases to $110, the stop loss will automatically adjust to $104.50 (5% below the new market price).Trailing stops can be used on various types of securities like stock, options, and futures. The key to using a trailing stop effectively is to have an idea of the stock's volatility and to set the trailing stop percentage or dollar amount appropriately. Traders can use the volatility of the stock or other securities as a guide to set the trailing stop, this will also depend on the strategy they use.In summary, A trailing stop is a way to lock in profits while giving the stock room to move. It's a dynamic stop loss that automatically adjusts as the stock price moves in the desired direction. This is why it's a great way to manage risk and protect profits.
