Trailing Stop

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Definition of 'Trailing Stop'

A trailing stop is a type of stop-loss order that automatically adjusts to follow the price of a security as it moves up or down. This means that if the price of the security increases, the trailing stop will also increase, and if the price of the security decreases, the trailing stop will also decrease.

Trailing stops can be used to protect profits on a winning trade or to limit losses on a losing trade. For example, if you buy a stock at $100 and set a trailing stop at $5, the stop will move up to $105 if the stock price rises to $110. If the stock price then falls back to $105, the stop will be triggered and your trade will be closed at a profit of $5.

Trailing stops can also be used to lock in profits on a long-term investment. For example, if you buy a stock and plan to hold it for several years, you could set a trailing stop that is based on the stock's 200-day moving average. This would ensure that you would not lose money if the stock price fell below its long-term trend.

It is important to note that trailing stops are not always effective. If the price of a security moves quickly in one direction, the trailing stop may not be able to keep up and the trade may be closed at a loss. Additionally, trailing stops can be triggered by small fluctuations in the price of a security, which can lead to unnecessary losses.

Overall, trailing stops can be a useful tool for traders, but it is important to understand their limitations before using them.

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