A trailing stop is a type of order used in trading to secure profits while allowing for potential further gains. It functions by automatically adjusting the stop-loss level as the price of an asset moves favourably. Typically, once a trader sets a trailing stop, it will follow the market price at a specified distance (in points or percentage). If the asset price increases, the trailing stop rises but remains in place if the price decreases.
This mechanism helps manage risk, as it locks in profits if the price reverses beyond the adjusted stop level. However, it is important to note that a trailing stop will not ensure a specific exit price or limit losses, as it is subject to market volatility and slippage.