What is a Trailing Stop $ Order (or a Trailing Stop % Order)?
It is a special stop order where the activation price of the stop order "trails" the price of the security by a dollar amount (or by a percentage amount) when it is moving in a favorable direction, but still protects the investor from rapid pullbacks.
Frank bought Company XYZ for $10. He decides that he doesn' want to lose more than $2 on his investment, but he wants to be able to take advantage of any price increases. He also doesn’t want to have to constantly monitor his trades to lock in gains. He could set a trailing stop on XYZ that will automatically sell if the price dips more than $2 below the market price.
The benefits of the trailing stop are two-fold. First, if the stock moves against him, the trailing stop will trigger when XYZ hits $8.00, protecting him from further downside.
But if the stock goes up to $20, the trigger price for the trailing stop comes up along with it. At a price of $20, the trailing stop will only trigger a sale if the stock drops below $18. This helps him lock in most of the gains from the stock's rally.