What is a trailing stop-loss order?

A trailing stop limit order is designed to allow an investor to specify a limit on the maximum possible loss, without setting a limit on the maximum possible gain. These orders continuously recalculate the stop-loss price at a fixed amount below the market price, based on the user-defined “trailing” amount. So as the stock price moves up, the stop-loss price will also move up maintaining the user-defined trailing amount.

For example, Mr X bought shares @ ₹100. He places a trailing stop loss order @ ₹90 with a trailing gap of ₹10. If the stock price goes up to ₹105, the stop loss price will also recalculate itself to ₹ 95 maintain the trailing gap. So if the price moves further up to ₹130, the stop-loss price will become ₹120. But suppose the stock price starts falling to ₹125, the stop-loss price will remain @ ₹120. The trailing stop-loss orders will recalculate itself to maintain the trailing gap if the price moves in favour of the investor but will not recalculate in the event that the share price moves against the favour of the investor.

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