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Anyone who has ever entered a trade should have a good idea of what a stop loss order is. It is the position at which you decide to exit the trade if it does not move in your direction, in other words it prevents further losses. But this is not the only way to automatically exit a position that starts right but then turns against you, and if you are not using a trailing stop system, you may be allowing the gains that you make to dissipate.

The idea behind a trailing stop is that when the trade is successful, and moves into profit, the stop loss price moves up with it. The trailing stop does this automatically as the price increases, commonly lagging a set distance or a set percentage behind the price. The key factor to a trailing stop is that it never backs down again, so if the price falls the stop does not move. If the price drops sufficiently, then the stop is hit, and the trade is exited.

The trailing stop may or may not be put "in the market", that is you can ask your broker to run it for you, or you can keep your own watch on the price movement and calculate at what point you will want to sell. An alternative used by some people is to enter a stop loss order “in the market”, and periodically go in and raise it as the trade progresses, effectively making it a trailing stop, but without the continual updating that a true trailing stop would have.

The beauty of a trailing stop is that it works with a winning trade to lock in your profits. As soon as your trade has gained the value of the offset that you have on the trailing stop, then the trailing stop rises to your entry price and you will no longer lose on the trade, subject to the mechanics of the market, no matter what the price does later. As the trade continues to rise, the rising stop will lock in more and more profit. Even if you do not choose an exit point from the trade, the trailing stop will ensure that you are taken out of the market if the price reverses.

The simple technique of using a trailing stop adds another dimension to trade management. It means that you need not be tied to your computer in the middle of the trade, yet you will still stand to make most of the gains that your pick realizes. Although the idea is simple and elegant, there is a great deal more to effective use of a trailing stop. Books have been written about the best distance to set the stop below the price.

Learning about a trailing stop is an important part of your trading education. You may want to experiment with setting your stop according to a multiple of the average fluctuation, or in relation to moving averages. Whichever you find works best, you may be sure that a trailing stop will help you realize your best profits.