Trailing Stop is a type of stop-loss order designed to protect profits while allowing a trade to remain open and continue gaining value. Unlike a fixed stop-loss, which stays at a set price, a trailing stop automatically adjusts as the market moves in your favor. It “trails” the market price by a specific percentage or amount, offering both flexibility and risk management.

In simple terms, when the price of a stock or asset rises, the trailing stop moves upward accordingly. However, if the price begins to fall, the stop remains fixed at its last adjusted level. Once the price hits this level, the position automatically closes, locking in profits before larger losses can occur. This dynamic mechanism helps traders minimize emotional decision-making and stick to a disciplined exit strategy.

For example, if a trader sets a trailing stop at 5% below the market price and the stock moves from _100 to _120, the stop level will move from _95 to _114. If the stock then declines, the order triggers at _114, securing a profit of _14 per share.

Benefits of a Trailing Stop include automated profit protection, better risk control, and reduced need for constant market monitoring. It is particularly useful for volatile markets where price fluctuations are frequent. However, traders should avoid setting the trail too tight, as normal price movements might trigger premature exits.

Trailing stops are commonly used in equities, commodities, and derivatives trading, aligning with prudent risk management practices encouraged by regulatory authorities like SEBI. It is important for investors to understand that while trailing stops can safeguard profits, they do not guarantee a specific return, as prices may move rapidly during market volatility.