What is the purpose of a 'trailing stop' order in currency trading?

The purpose of a 'trailing stop' order in currency trading is to protect gains by enabling a trade to remain open as long as the market price is favorable. This type of order allows traders to set a specific distance from the market price at which the stop order will be activated. As the market price moves in a favorable direction, the trailing stop adjusts upward (in the case of a long position) or downward (for a short position) to reflect this change, thereby locking in profits. If the market price reverses and reaches the trailing stop level, the order is executed, allowing the trader to exit the position while still securing a profit.

This mechanism allows traders to take advantage of favorable price movements while providing a level of risk management by enabling them to exit the trade before any significant loss occurs if the market turns against them. Such a feature makes trailing stops a valuable tool for traders looking to maximize their gains in fluctuating markets.