What is a trailing stop-loss?

A trailing stop-loss is a type of stop-loss order that moves with the market price of an asset. It allows traders to lock in profits while protecting themselves from large losses by automatically adjusting the stop price as the price of the asset moves in their favor. This dynamic approach helps ensure that you don’t lose more than a predetermined amount, while still giving you the opportunity to capitalize on favorable price movements.

1. How Does a Trailing Stop-Loss Work?

A trailing stop-loss is a type of stop order that moves with the market price. Unlike a traditional stop-loss order, which is set at a fixed price point, the trailing stop adjusts as the market price of an asset moves in your favor. The stop-loss level is set a specific percentage or dollar amount away from the current market price, and it "trails" the price as it moves higher (for a long position) or lower (for a short position).

For example, let’s say you buy a stock at ₹100 and set a trailing stop-loss of ₹5. If the stock price rises to ₹110, the trailing stop-loss would adjust to ₹105. If the stock price continues to rise, the trailing stop-loss would keep adjusting accordingly. However, if the stock price begins to fall, the stop-loss will remain at ₹105, locking in a profit.

2. Key Benefits of a Trailing Stop-Loss

Using a trailing stop-loss in your trading strategy offers several key benefits:

• Lock in Profits: A trailing stop-loss helps you secure profits by adjusting the stop level as the asset’s price rises, ensuring that you don’t give back too much of your gains if the price reverses.
• Automated Risk Management: Once the trailing stop-loss is set, it automatically adjusts with the price of the asset, saving you the hassle of constantly monitoring and adjusting your stop-loss manually.
• Protection from Large Losses: By setting a trailing stop-loss, you can protect yourself from substantial losses during unfavorable price movements while still allowing for growth in your position.

3. How to Set a Trailing Stop-Loss?

Setting a trailing stop-loss is simple and can be done through your trading platform. Here's how you can set one:

• Determine Your Trailing Amount: Decide how much you are willing to risk. This can be a fixed percentage or dollar amount, such as ₹5 or 5% below the current market price.
• Enter the Trailing Stop Order: On your trading platform, select the option to place a "trailing stop" order. Enter the amount or percentage below the market price where you want the stop-loss to be set.
• Monitor the Adjustment: Once the trailing stop is active, it will automatically adjust as the price of the asset moves in your favor. Keep an eye on your position to ensure it is functioning as expected.

Example: If you buy a stock at ₹100 and set a trailing stop-loss of ₹10, when the stock price rises to ₹120, your stop-loss will automatically adjust to ₹110. If the stock then starts to fall, your stop-loss will remain at ₹110, protecting your profits.

4. Types of Trailing Stop-Loss Orders

There are two main types of trailing stop-loss orders that traders use:

• Fixed Dollar Amount: You can set the trailing stop at a fixed amount below the market price. For example, if you set a ₹10 trailing stop, the stop will move up by ₹10 as the price rises and remain fixed at ₹10 below the market price.
• Percentage-Based Trailing Stop: You can set the stop as a percentage of the market price. For instance, if you set a 5% trailing stop, the stop-loss will automatically adjust to 5% below the current price of the asset.

Both methods are designed to protect your position while still allowing you to benefit from price increases. The choice between the two depends on your trading strategy and risk tolerance.