Definition of 'Trailing Stop'
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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