A trailing stop order is an order with a variable stop price. If the price of the security moves away from the chosen stop price, the stop level moves with it. With this order type a stop price must be chosen. The stop price determines the stop level after placing the order. Additionally you have to set a distance as absolute value (for example in EUR) or in percent.
If the price of the security moves in such a way that the distance to the stop price increases, the stop price will move to re-establish the predetermined distance. If the price of the security moves in such a way that the distance to the stop price decreases, the stop level stays the same.
Example: Sell order of 20 shares of stock ABC. Current price is 10 EUR.
(1) You place a trailing stop sell order with a stop price of 9,70 EUR and a distance of 5 %. The stop price is set to 9,70 EUR at the exchange because the stop price is closer to the current price than what the chosen distance indicates.
(a) The price increases to 10,5 EUR. The stop price moves to 9,975 EUR due to the chosen distance of 5 %. If the price falls to this level, the sell order will be executed.
(b) The new stop price is at 9,975 EUR. If the current price of the stock falls to 10,20 EUR, the stop price stays the same.
(c) The price of stock ABC moves from 10,20 EUR to 11 EUR. The stop price is therefore moved to 10,45 EUR.
(2) You place a trailing stop sell Order with a stop price of 9 EUR and a distance of 5 %. Since the entered stop price is more than 5 % away from the current price of 10 EUR, the stop price will immediately be set to a level of 9,5 EUR. The entered stop price of 9 EUR will not be relevant in this case.