A trailing stop loss is a sophisticated risk management tool used in trading to mitigate potential losses and safeguard profits. This order type dynamically adjusts the stop price relative to the market price of a stock, either in percentage terms or by a fixed number of points.Its primary function is to protect gains by continuously modifying the trigger price as the stock price fluctuates. For instance, if the stock price rises, the trailing stop loss trails it upward, maintaining a predetermined distance, thus locking in profits. Conversely, if the stock price falls, the stop price remains unchanged until the price reverses and hits the trailing stop loss threshold, at which point it triggers a market order to sell, limiting potential losses.To employ a trailing stop loss effectively, one needs to set the initial trigger price and the increment by which it adjusts with the market movement. It's a flexible tool that allows investors to secure gains without constant manual adjustments while also serving as a protective barrier against unexpected downturns in stock prices.Refer to the examples below to understand better:‘Sell’ Trailing SL:Trigger Price moves up | Stock Price Moves upE.g., if you buy XYZ LimitedBuy Price: ₹50CMP: ₹55SL: ₹48Trailing SL = 1 TICK where 1 tick = ₹.5Now,MTM Profit = 55-50 → ₹5Since the stock price moved up by ₹5, the trigger price of ‘sell’ trailing SL will also move up by 5 x 1 tick size = 5 x .5 → ₹2.5.Therefore, the New Trigger Price = ₹57.5Similarly, in a 'buy' trailing stop loss scenario, the trigger price adjusts downward in tandem with the movement of the stock price.