Trailing Stop Order
A trailing stop order is a dynamic stop-loss order that automatically adjusts the stop price as the market price moves in the investor’s favour. It locks in profits by moving the stop-loss up (for long positions) as the stock rises, while keeping the stop at the new higher level even if the stock temporarily falls.
What Is a Trailing Stop Order?
Instead of a fixed stop price, a trailing stop moves with the market:
– For a **long position** (stock bought): the trailing stop moves up as the stock rises but does not move down if the stock falls
– For a **short position**: the trailing stop moves down as the stock falls but does not move up if it rises
The trailing amount is specified either as:
– **Absolute amount**: stop trails by Rs 10 (if stock is at Rs 200, stop is at Rs 190; if stock rises to Rs 220, stop moves to Rs 210)
– **Percentage**: stop trails by 5% (if stock at Rs 200, stop at Rs 190; if stock rises to Rs 250, stop at Rs 237.50)
Trailing Stop vs Fixed Stop-Loss
| Feature | Trailing Stop | Fixed Stop-Loss |
|———|————–|—————-|
| Adjusts with price | Yes (upward) | No |
| Locks in profits | Yes | No |
| Downside protection | Yes | Yes |
| Flexibility | Higher | Lower |
Practical Use
A trailing stop allows investors to participate in a strong uptrend without manually moving stop-losses, while still having automatic downside protection if the trend reverses.
Practical Example
Priya buys a stock at Rs 100 and sets a 10% trailing stop (Rs 10). The stop activates at Rs 90 initially. Stock rises to Rs 150: trailing stop moves to Rs 135 (Rs 150 – Rs 15). Stock then falls from Rs 150 to Rs 135: the stop triggers and Priya sells at Rs 135, capturing Rs 35 profit (35%) instead of the full Rs 50 upside but also protected from further decline.
Key Takeaways
– Trailing stop orders automatically move the stop-loss in the direction of the trend
– For long positions, the stop moves up as the stock rises, locking in increasingly more profit
– The stop does not move back down, protecting gains already accumulated
– Set as an absolute amount (Rs X) or percentage (%)
– Useful for trending stocks in bull markets; reduces need for manual stop-loss adjustments
