When you are trading stocks, you may be wondering what a trailing stop order is and why you would use it. Trailing stops indicate the price at which a market order should be placed. The downside is that they are prone to pricing gaps that may occur during pauses in trading. Using trailing stops can protect you from losing your profits when a price rises and a new price declines.
What is a trailing stop order will continue to increase in value as the price of the underlying security rises. If, however, the price drops, the stop will automatically fire and send the underlying order to the exchange. This type of order allows a trader to enter the market at a better price while avoiding going against the price trend. With a trailing stop, a trader can enter at a lower price, increase their chances of success, and keep a watchful eye on their investments.
Traders should evaluate their trailing stop strategy on a regular basis. Depending on their trading experience, risk tolerance, and financial condition, they can adjust the trailing stop order to meet their trading goals. They should determine their callback rate and activation price based on the range of price changes. For example, if a trade is trading on a short term basis, the trailing stop order would be activated if the price of the underlying security drops below the set percentage.