Trailing stop definition
A trailing stop is a type of stop order set at a number of pips from the current market price. They automatically follow your position as the market moves in your favor, but close out if the market moves against you.
Trailing stops allow you to increase your locked-in profit as the market moves favorably, without the need to constantly adjust your stop.
How to set a trailing stop
Traders more commonly set trailing stops as a percentage instead of a fixed amount, as this is easier to reconcile with the amount of risk you are willing to take on.
If a trailing stop is set too close to the current price, it could be activated by normal market movement and prematurely close your trade before gains are locked in. If the trailing stop is set too wide, you risk unnecessarily large losses.
You should analyze the average pullback for the security when setting a trading stop. If the average pullback is about 4% with larger ones near 7%, a reasonable trailing stop may be 9% to 10%. Many forex traders set trailing stops at 15% to 20%.