Trailing stop
How does a stop-loss protect gains as a price rises, and what happens when the price turns down?
In plain words
A trailing stop is a stop-loss order placed at a fixed distance or percentage below the highest price reached since the order was set. As the price makes new highs, the stop moves up with it; when the price falls, the stop stays where it is, locking in a progressively larger cushion of protected gain.
Why it matters
It converts an open profit into a ratchet: the position can keep participating in an advance while carrying a defined exit level that never gives ground. The trade-off is that a normal pullback can touch the stop and close the position before the price resumes rising, and a sudden reversal can fill far below the stop level.
In a real week: ETH, week of 26 March 2018
In the week of 26 March 2018, ETH printed its high of 527.67 at 00:00 UTC on Monday, then never revisited that level. A trailing stop tracking that high would have locked in place as the price declined, and ETH closed the week at 378.58, down 27.75% from the open, with a low of 356.90 on Sunday and a close in the lower third of the week's 47.85% range. Because the high came first and the low followed on Sunday, the stop had no new high to follow and would have stayed at its initial level as the price fell.
A common mistake
Expecting a trailing stop to protect a fixed dollar amount. During a fast fall the exit price can be well below the stop level, so the realised loss often exceeds the intended distance.