TRAILING STOP LOSS

A complex stop-loss order in which the stop is set at some fixed percentage below the market price. If the market price rises, the stop loss price rises proportionately, but if the stock price falls, the stop loss price doesn't change.

This technique allows an investor to set a limit on the maximum possible loss without setting a limit on the maximum possible gain. It does this without requiring to pay attention to the investment on an ongoing basis.A trailing stop helps protect profits while providing downside protection.

Mechanism of Trailing loss order:

An investor decides to buy into a bull market with the possibility of losses covered by a stop loss. A prudent investor will exit the market once the perceived price is achieved losing on the chance to make any money out of the gains over and above his target. But the idea of the trailing loss order is to raise the exit barrier in the direction of trade instead of setting an absolute value on the rise. A trader using a trailing stop loss would still be hanging on to trading buy waiting for newer highs to be conquered, while the investor with the target selling would have exit the market rally by then.

When the market rises, the trailing stop loss also rises in proportion with the market, leading to escalated stop loss level. But when the market declines, the trailing stop loss doesn’t decline in line with the market. So the profits are protected under such orders. The losses are limited to the extent of the stop loss value.