A trailing stop is a stop-loss order that follows the market at a fixed distance, set as a number of points, pips, or a percentage. It moves with price in your favour to lock in gains, but it does not move back when price reverses.
On a long position the trailing stop ratchets up as price rises but holds its level if price falls. On a short position it ratchets down as price falls but holds if price rises. When the market reverses by the set distance, the order triggers and closes the position.
A trailing stop differs from a fixed stop loss. A fixed stop loss stays at the level you set until you move it by hand, while a trailing stop adjusts on its own as the trade gains, so it protects profit without manual changes. Like any stop, it can still be affected by volatility, gaps, and slippage in fast markets.
You buy EUR/USD at 1.0850 and set a 50-pip trailing stop, so the stop starts at 1.0800.
EUR/USD rises to 1.0950, and the trailing stop follows 50 pips behind, up to 1.0900.
If EUR/USD then falls to 1.0900, the trailing stop triggers and closes the trade, banking part of the gain:
1.0900 - 1.0850 = 0.0050, or 50 pips locked in