Definition: An order with a stop price that is set at a percentage below or above.
Usage: This order is commonly used as an automatic measure to protect gains and reduce losses on outstanding positions.
To Sell Off Long positions
The trailing stop is set at a certain % below current market price. When the price moves up, the trailing stop will move up correspondingly as well. If the price comes down, the trailing stop will remain at previously indicated stop price. Once the current price is the same as the indicated stop price, the indicated limit price will be sent out to the market.
To Buy Back Short positions
The trailing stop is set at a certain % above current market price. When the price moves down, the trailing stop will move down correspondingly as well. If the price comes up, the trailing stop will remain at previous indicated stop price. Once the current price is the same as the indicated stop price, the indicated limit price will be sent out to the market.
An example of a trailing stop order used to protect gains
Client A takes up a long position and buys at $0.60. He submits a trailing stop order of 10%, which puts the initial stop price at $0.54.
The market price increases to $0.74, and the new stop price is now 10% lower at $0.67.
The market price falls to $0.69 but the stop price remains at $0.67. As the market price is still higher than the stop price, the order is not triggered.
The market price increases yet again to $0.81, bringing up the stop price to $0.73.
The market price drops to $0.73, which is the stop price, and this triggers the trailing stop order. A limit order of $0.73 is automatically submitted to sell the currency pair.
With the trailing stop order, Client A’s gains from the currency pair have been automatically protected from fluctuations in the market, as indicated above.