What is a trailing stop

Trailing stop simply put "is the number of pips the market should move your stop-order"

Let's say you place a buy-order for gbp/usd at 1.9500 - and the your stop-order is at 1.9450 (stop-order is nothing but stop-here-and-get-me-out-of-the-trade order)

Scene 1: A few hours (mins) later you realize that your order started making your profit - the market moved up to 1.9575 - profit = 75 pips.

Scene2: You return again - after a few more hours - and see that the market is now at 1.9620 - netting you a profit of sweet 120 pips.

Now, let's see what happens with the trailing stop:

scene #	Opened at:	stop-order	Trailing Stop	Current Market Price	Profit-locked
1	1.9500	1.9450	50
2	1.9500	1.9500	50	1.9550	0
Notice when the market hit 1.9550 (50 pips from your original opening price) - the trailing stop which was also set at 50 - moved your stop-order up to 1.9500 - so should the market turn around come back to 1.9500- your order would be removed with NO LOSS to you.
3	1.9500	1.9500	50	1.9575	0
The market went further to reach 1.9575 - 25 pips more than scene #2 - but since it has not reached 50-pips from the scene #2 - you stop-order is still at 1.9500
5	1.9500	1.9550	50	1.9600	50
Now, the market moved to 1.9600 - that's 100 pips away from your opening price - the stop-order has been moved to 1.9550 - locking in 50 pips. However, you won't get out of the trade unless the market reaches 1.9550 - say the market keeps moving up to 1.9650...
6	1.9500	1.9600	50	1.9650	100
If the market reached 1.9650 - you would have locked in 100 pips profit - again, your trade is not closed yet - you just locked the profits - the market could still go up and give you more profit or turn back and close your trade for a sweet 100 pips profit.
7	1.9500	1.9600	50	1.9650	100
The setting is same as scene #6 - you locked 100 pips in profit, but look at the trade - at this point when the market is at 1.9650 - thats 150 pips profit - if you close the trade NOW. 50 pips more than your locked-profit. Since, we don't expect to be at the computer all day - you can use लिमिट order to get out here - making an extra 50 pips that just using trailing stop.

Now all this profit would have been lost - if you didn't use trailing stop - the market could have hit 1.9625 - that's 125 pips from your opening price and turned right around and came back to test 1.9500 again - its wise to lock in your profits.

Again, if you think that the market has certain potential - which you happen to know - based on daily-range or other variables - you can use "limit order" - which we discuss in the next lesson - as an exit for your order.

However, we stronly recommend that you use BOTH the trailing stop (which cannot be used without a stop-order) - and a Limit order - you have better chance of making profit - albeit small - a profit is still a profit - who knows, you might actually hit your limit order and make the "desired" profit - which we should be first to tell you - doesn't happen always - but it DOES happen - its not impossible.