Basically, a trailing stop is a type of stop-loss order. It combines two elements, risk management, and trade management. People usually also call it protecting stops since it helps lock your profit while also capping your possible losses. A trailing stop can be set up to work automatically with most broker or software for your day trading.
How does it work?
The initial placement of a trailing stop is similar to a regular stop-loss order. A long trade with a trailing stop will be a sell order and will be placed below the trade entry.
The biggest difference between the regular stop loss and trailing stop is only trailing stop moves whenever the price moves. For instance, for every seven cents moving price, the trailing stop will also move seven cents. Yet once the price starts to fall, the still loss will not move.
How to place or move it?
You can ask the help from a broker if you want to. Most brokers allow you to use a trailing stop-loss order type.
Choose a trailing stop or trailing stop loss when you place a stop loss. After that, you need to set how much room you are willing to give to your trade. For instance, 10, 20, or 5 cents.
Confirm the order and you can see your stop loss moves automatically as the price moves. You can manually trail your stop loss, it automatically changes the stop-loss price as the price moves.
What to be avoided?
The most common mistake made by traders who place a trailing stock is they place it too close to the current price. The example can be a one or two-cent trailing stop loss.
As most of the stock prices are always winding by a couple of cents, at least, every minute, then placing a trailing stop loss to close to the entry will make your trade stop before a meaningful price moves.
It should be placed further from the current price that you do not want to be reached except the market changes its direction.
For instance, a market that fluctuates in a 10 cents range while is moving in the same trending direction will need a larger trailing stop that is bigger than ten cents. Yet it should not be too large that the entire point of the trailing stop is negated.