Optimal Trading with a Trailing Stop

Trailing stop is important for many automated trading systems.

Trailing stops are popular trade orders widely used by proprietary traders and retail investors to provide downside protection. In contrast to a stop-loss exit which closes a position at a fixed price, a trailing stop is characterized by a stochastic floor that moves based on the running maximum of the asset price. This provides a dynamic downside protection as the stochastic floor is automatically adjusted upward whenever…