A trailing stop is an exit order that follows the price as a trade moves in your favor, staying a set distance behind. If you are long and the price rises, the stop rises with it; if the price then falls by your trailing amount, you are out - with the gains you had already banked. It never moves against you.
Why it beats a fixed target
A fixed profit target caps your upside: you exit at your number even if the move was just getting started. A trailing stop solves the "sold too early" problem by letting the trade breathe. You give up trying to pick the exact top and instead let the market tell you when the move is over - you are stopped out only after price reverses by your chosen distance.
The trade-off: give-back
The cost is give-back. Because the stop trails behind the peak, you always surrender some of the best price when it reverses. Set the trail too tight and normal noise knocks you out early; set it too wide and you hand back too much. The right distance depends on the instrument's volatility - a calm tape wants a tighter trail than a violent one.
A trailing stop trades a little give-back for the chance to hold a big winner all the way.
Layered exits
Many disciplined systems do not rely on a single exit. They scale - taking partial profit at a target, then trailing the rest to capture a trend if one develops. That combination banks something on the frequent small moves while staying in for the occasional large one. What matters is that every one of those exits is mechanical - decided in advance, executed without hesitation - not renegotiated live while the P&L flickers.
More on this: What Is a Trailing Stop? A Stop That Follows Your Winner
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