What is a Trailing Stop Order?

A trailing stop order is a type of order that investors can use when trading in the financial markets. This type of order is commonly used in the stock market and the Forex market, but could be used in any financial market. Here are the basics of the trailing stop order and how it works. 

Stop Loss Order

The trailing stop order is a variation of a stop loss order. When you are trading in your online trading platform, you should be able to specify at what level you want to take profit or which level you want to close out a loss. The stop loss order is a pending order that you can enter in order to limit a loss. If the market price falls to this level, the trade will be closed out. You will not have to manually do anything in order to close the trade if this occurs. Instead, the trade will be closed automatically.

Trailing Stop

This type of order utilizes the same principle as a stop loss order with one key difference. Instead of setting your stop loss at a particular level, you will be able to set it at a percentage of what the market price is at. If the price in the market increases from where you entered a trade, the stop loss will increase as well. This means that the stop loss order is going to change automatically when the market changes. If the market goes back down, the stop loss will not move back down. Instead, it is going to stay at its highest point and will close the trade if the market price gets back down to that level. 

Preserving Capital

One of the primary benefits of using a trailing stop order is that it is going to help you preserve your capital. This type of order is going to lock in some of your profits as the trade is moving. This means that you will be able to keep some of the profit that you earn as the market increases. Then if the market backtracks, you are not going to lose the entire amount of profit that was earned. This can be a good strategy to use when you want to get at least something out of every trade. You may not have a big winner every time, but you will usually be able to limit your losses and get small profits. 

Automation

Another big benefit of using a trailing stop order is that you are going to be able to automate part of the process of trading. Once you enter a trade, you can utilize a trailing stop order to manage the trade for you. If you have to be away from your trading station for a certain amount time, you can enter this order and it will make sure that your profits are locked in while you are away. 

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