what is trailing stop loss

A trailing stop is a type of market order that sets a stop-loss at a specific percentage or dollar amount below an assets market price, rather than on a single value. It is a modification of a typical stop order that can be set at a defined percentage or dollar amount away from a security's current market price. The stop-loss then trails behind the stock as its price moves, adjusting according to market movement. The key benefit of using a trailing stop is that it can lock in profits or limit losses as a trade moves favorably. The efficacy of a stop-loss can be enhanced by pairing it with a trailing stop. The key to using a trailing stop successfully is to set it at a level that is neither too tight nor too wide. Placing a trailing stop loss that is too tight could mean the trailing stop is triggered by normal daily market movement, and thus the trade has no room to move in the trader's direction. A stop loss that is too tight will usually result in a losing trade, albeit a small one. Trailing stops can provide efficient ways to manage risk and are often used as part of an exit strategy. However, they are vulnerable to pricing gaps, which can render them redundant or obsolete.