What is a trailing stop?

A trailing stop is a stop order that is typically set at a specific percentage or dollar price away from a stock's bid price. The trailing stop order moves up as the bid price rises, but it may be executed once the bid price dips below the trigger price.

The trader sets the trail amount after determining how closely he wants his trigger price to trail the bid price. This amount must not exceed 30 percent of the bid price. As the market moves, the trigger price may be adjusted upward but never downward. A trailing stop protects gains and minimizes loses.