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Trailing stop is a market order that let you maximize your possible returns while minimizing your potential losses while trading equities. Trailing stop can be set up in the form of sell trailing stop or buy trailing stop.
Sell trailing stop order is used in a way that allows you set the percentage bellow the current market price at which you would like to sell you stock. While the stock price is rising, trailing stop raises also by the trail amount, but if the stock begins to fall, trailing stop remains on its most recent level while the stock was rising. At the moment when stock price reaches it predetermined trailing stop, it would be sold in order to minimize potential losses. In this way, possible returns are not limited, as trailing stop activates only when the stock price begins to fall bellow its most recent market price. Sell trailing stop is used on the rising markets.
Buy trailing stop is used in the opposite way and on the falling markets, in order to buy a stock at the best possible price. While the stock price is falling, investors want to buy at the lowest possible price. That’s where the buy trailing stop comes handy. If investor puts buy trailing stop at some percentage above current market price, and the stock continues to fall, trailing stop will follow the price and will be activated only when the stock price begins to rise. When the trailing stop percentage is reached, stop order will be executed and the investor will buy the stock.