A trailing stop-loss order is a special type of trade order where the stop-loss price is not set at a single, absolute price amount, but instead is set at a certain percentage or a certain price amount below the market price. A trailing stop-loss is sometime referred to simply as a trailing stop.
When the price goes up, it drags the trailing stop-loss along with it, but when the price stops going up, the stop-loss price remains at the level it was dragged to
A trailing stop-loss can be good for investors who may not have enough discipline to lock-in gains or cut losses. It removes some of the emotion from the trading process and offers some capital protection automatically.
There are some steps to follow the trailing stop – loss :
First – you need to consider your trailing stop percentage or amount very carefully. If you’re investing in a particularly volatile stock, you could find the stop level triggered fairly perpetually .
Second- frequent trading can have tax implications such as wash sales for stock held less than 30 days.
Finally – trailing stop loss is to capture profit as the price moves in our direction and to get us out if the price is potentially reversing.