A trailing stop loss is a dynamic risk management tool that helps traders lock in profits while protecting against losses as the market moves. Unlike a fixed stop loss, which stays at one price level, a trailing stop adjusts automatically when the price moves favourably. It “trails” the market at a set distance, either a fixed number of pips, a percentage, or a dollar amount, depending on how the trader configures it.

For example, if a trader sets a trailing stop 50 pips below the current price of a long position, the stop will move upward each time the price increases. However, if the price drops, the stop remains at its last level and will trigger once the market hits that point. This mechanism allows profits to grow while limiting downside risk without the need for constant manual adjustment.

Trailing stops are especially useful in volatile markets, where prices can change quickly. They help traders stay disciplined by removing emotion from exit decisions and letting profitable trades run longer. Many trading platforms offer automated trailing stop features, making them easy to implement. However, traders must choose the trailing distance carefully; too tight, and normal price swings may trigger it early; too wide, and it might not protect profits effectively.