A trailing stop is a dynamic stop-loss order that automatically follows the price in a favorable direction and locks in gains when the market reverses. In a long position, the trailing stop moves upward as the price rises; in a short position, it moves downward as the price falls. If the trailing stop level is reached, the position is closed automatically. The distance of the trailing stop can be defined in pips, percentages, or based on indicators such as the ATR. Trailing stops are particularly useful in trending markets, as they allow traders to stay in profitable moves while protecting accumulated gains. In sideways or choppy markets, however, trailing stops may lead to premature exits due to frequent price fluctuations.
