In the option market, the chances of losing money are higher, with the potential of earning profit. Traders, in order to minimize losses, use risk management tools such as stop-loss orders.

A Stop loss is a market order that allows a trader to close a position when the market moves against their prediction. In this way, a trader will not lose more money than the loss-taking capacity, even in unfavourable market conditions. 

Stop-loss orders are a great tool for safeguarding trade capital. However, it is quite rigid. It may be possible that the market again turns in your favour, and you may lose a profitable opportunity due to early exit from trade. This limitation of stop-loss orders gives birth to trailing stop-loss orders.

A trailing stop loss order is an enhanced version of a stop loss order. Under this, the stop loss level adjusts when the market condition moves in traders’ favour. It ultimately increases the chances of earning profit and reduces the loss probability.

Trailing stop loss orders are flexible and adaptable ways to trade in volatile and changing option markets. The order is helpful in both rising and falling markets. During a bullish market, the trailing stop loss level is placed below the current price and moves upward word when the price rises. Meanwhile, in the falling market, a trailing stop loss level is placed above the market price and moves below as the market falls.

Let us look at an example to understand how trailing stop loss works. Suppose the EUR/USD currency pair is trending at 1.0430, and the trader opens a buy position at the current market price. The trader set a trailing stop loss level of 20 pips at 1.0410.  In this case, if the price rises to 1.0460, then the stop loss level moves to 1.0440. In the above example, if the price keeps rising, then the trader will lock the trade at a profit, or if the market turns and the price falls, the trade will automatically close at 1.0440.