Stop-loss order is a type of order to limit our losses when we transact in share selling or buying. Let us take an example where we have bought a share at a price of say Rs 400 and now we are apprehensive that it might go down. So we would place a stop-loss order either online or with our broker and we have to specifically tell at what value it has to be sold. Suppose we tell that if the stock goes down to Rs 380 then sell it. So if the share price goes down then as soon as it reaches Rs 380, it would be sold but not before that. So our loss is limited to Rs 20 per share.
Trailing stop-loss, as the name suggests, trails the market price of the share and from that price calculates the pre fixed percentage to sell the share to limit the loss. For example to understand it let us assume that we have bought a share for Rs 300 and now we order a trailing stop loss of 5% so if it goes down then it would be sold at Rs 300 - 5% of Rs 300 = Rs 285. But suppose it goes up and then starts coming down from Rs 360 then while coming down as soon as it reaches Rs 360 - 5% of Rs 360 = Rs 342, it would be sold. So, this is a good type of order as compared to the fixed stop-loss where there is no trailing.
We have to note that each method has its own pros and cons and whatever method one uses in share market the gain is always unpredictable so one should be cautious in using these tools. For example in trailing stop-loss order if the share rises fast but decreases significantly in between before again rising then the sell order would be executed and it would be sold as soon as it reaches within that predefined percentage. In simple stop-loss order it would not happen. We must also remember that tools are designed for minimising losses and there is no tool which can avoid losses. One has to be very prudent in share market dealings especially when using these advanced tools.
Knowledge is power.