Trailing stop loss

A plain stop loss order sits at a fixed price. If the market rises a long way and then collapses, it still triggers only at that original level — giving back all of the gain.

A trailing stop loss follows the market up. The trader sets a distance — in rupees or as a percentage — and the trigger stays that far behind the best price reached. When the market falls back by that distance, the order fires.

The workbook states its purpose in six words: to minimize losses and protect potential profits.

Where it lives. Ordinary stop loss orders are within the exchange's system architecture. A trailing stop loss may be provided at the broker level (Chapter 6, section 6.5.1).

Two types:

• Trailing stop loss in rupees;
• Trailing stop loss as a percentage.

The rules, for a long position:

Stop loss mechanics it inherits. Stop loss orders are passive until the trigger is breached. For a sell stop, execution happens when the best buyer is at or below the trigger. Stop losses help mitigate unlimited losses in volatile markets — but frequent triggering without much directional movement can produce higher cumulative losses across trades.

The workbook's example. A trader buys June gold futures at Rs 50,000 per 10 g and places a trailing stop loss in rupees at Rs 49,000 — a trail of Rs 1,000.

On a 1 kg contract (100 x 10 g):

Exit at about 52,000, entry 50,000
Gain locked in ≈ (52,000 - 50,000) x 100 = Rs 2,00,000

A fixed stop at Rs 49,000 would have let the whole Rs 3,00,000 of paper profit at Rs 53,000 evaporate if the price had fallen all the way back.

If the price had never risen and instead fallen straight to Rs 49,000, the trigger would have stayed at Rs 49,000 and fired there — a loss of Rs 1,000 per 10 g, or Rs 1,00,000 per kg. It never moves down to give the position more room.

Percentage version (illustrative): a 2 per cent trail from Rs 50,000 starts at Rs 49,000; at Rs 53,000 it sits at Rs 51,940. Because it is a percentage of a rising price, the rupee gap widens as the price climbs.

Chapter 6, section 6.5.1 (Orders with Price-Related Conditions), covers stop loss orders, their execution and the broker-level trailing stop loss with the Rs 50,000 gold example. Expect a question on where the trigger sits after a given price path, whether it moves down, and what kind of order it becomes when triggered.

• It moves up, never down (for a long position). A fall leaves the trigger where it was.
• When triggered it becomes a market order, so the fill is the best available price, not necessarily the trigger price.
• Offered at broker level, not as a native exchange order type in the workbook's description.
• Two forms: rupees or percentage.
• Stop loss orders are passive until the trigger is breached.
• Frequent triggers can cost more than they save in choppy markets without direction — the workbook's own caution on stop losses.
• The workbook's example ends with the price dropping to Rs 49,000 and the trigger staying at Rs 49,000. Read that as the case where the price never rose; after a rise to Rs 53,000 the trigger would already be at Rs 52,000.