Trailing Stop Loss Order Definition Explained with Examples

A trailing stop loss is a stop loss zones that keeps adjusting itself automatically by set number of pips once the market moves in direction of the trader's open trade by a number of pips.

For example the trailing stop can be set at 30 pips & set to adjust itself to 30 pips automatically once the price moves upward by 5 or 10 pips. This means that this trailing stop loss order will keep trailing the price as long as the price keeps moving in direction of the trader's open position.

This trailing stop loss will close out the order once the market starts to retrace & it retraces to the level of the most recently set trailing stop loss level.

A good indicator used to set trailing stop loss levels is Parabolic SAR indicator:

Parabolic SAR Indicator

Parabolic SAR is used by stock traders to set trailing price stop loss zones

Parabolic SAR provides good exit points which keep trailing the price on a chart.

In an upwards trend, you should close long trade positions when the price falls below the parabolic SAR

In a downward trend, you should close short trade positions when the price rises above the parabolic SAR.

If you are trading long then the price is above parabolic SAR, parabolic SAR will move up everyday, regardless of the direction in which the price is moving. The amount the parabolic SAR moves upwards depends on amount that prices moves. Once price moves below the parabolic SAR as shown on the example explained and illustrated below, then traders should close their open buy stock trades at trailing stop level provided by Parabolic SAR indicator.

Parabolic SAR - Indicator for Putting Trailing Stop Loss Order Levels