Trailing Stop Orders

A trailing stop is a stop order that moves with the price. For a long position, it rises as the price rises, staying a fixed distance below the highest price reached, but it never moves down. If the price falls back by the trailing amount, the stop triggers and you exit. It lets a winning trade run while locking in more profit as it goes.

How a trailing stop works#

You set the trail as a dollar amount, a percentage or, on some platforms, in ticks.

For a short position, the logic is reversed: the stop starts above the price, moves down as the price falls and triggers if the price rises by the trail amount.

Trailing by amount, percentage or volatility#

Broker trailing stops usually support amount and percentage. Volatility based trails, such as a "chandelier exit" that hangs a multiple of ATR below the highest high, are often managed manually or with a script. See ATR (Average True Range).

Choosing the trailing distance#

The distance is a trade off:

• Too tight: normal pullbacks stop you out early, and you miss the bigger move.
• Too wide: you give back a large share of your profit before exiting.

A good starting point is a distance beyond the asset's normal pullbacks in the trend you are trading. Review in your journal how far winners typically pull back before continuing, using maximum adverse excursion, and set trails just beyond that. See MAE and MFE.

When trailing stops work best#

• Strong trends, where a trailing exit captures much of the move without guessing the top. See Trend Following.
• Breakouts that run, after an initial stop has done its job.
• Positions where you cannot watch the market but want profits protected.

They work poorly in choppy, sideways markets, where the price whipsaws through the trail repeatedly.

Combining trailing stops with other exits#

Many traders combine methods:

1. Start with a fixed stop at the level where the idea is wrong.
2. Move the stop to breakeven once the trade reaches a set profit, such as 1R. See Moving Your Stop: Breakeven and Trailing Stops.
3. Take partial profits at a first target. See Scaling Out and Partial Profits.
4. Trail the stop on the remainder to catch any extended move.

Things to know about broker trailing stops#

• They become market orders when triggered, so slippage applies, as with any stop. See Stop Orders.
• Many only trail during regular hours, and may not adjust to pre-market highs.
• Gaps can still skip the stop entirely.
• Some platforms trail on the bid or ask, not the last trade; check your broker's documentation.

Common mistakes#

• Starting the trail too tight from entry, leaving no room for the trade to work.
• Manually overriding the trail to give a fading trade "more room".
• Using trailing stops in ranges where whipsaws produce a string of small losses.

Frequently asked questions#

What is a good trailing stop percentage?#

It depends on the asset's volatility and your timeframe. A volatile stock might need 8% to 15%, a calm index ETF 3% to 5%. Volatility based trails adapt automatically.

Does a trailing stop guarantee my profit?#

No. It locks in a minimum exit level, but because it becomes a market order, fast markets and gaps can fill it below the stop price.

Should I use a trailing stop on every trade?#

They suit trending trades. In range trading, fixed targets usually work better.

Sources#

• U.S. Securities and Exchange Commission, Trailing stop order