A trailing stop is a type of stop-loss order that adjusts automatically as the market price of an asset moves in a favorable direction. It is designed to help traders limit their potential losses and protect their profits in case the market moves against their position.
A trailing stop works by setting a percentage or a fixed amount of pips away from the market price of the asset. As the price moves in the trader’s favor, the trailing stop also moves by the same amount, maintaining the distance between the stop-loss order and the market price. If the market price reaches the level of the trailing stop, the order is triggered and the position is closed at the prevailing market price. The idea is to let profits run while minimizing potential losses.