This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
A trailing stop is a stop-loss order that follows the price as the trade moves in the favourable direction. The order starts at a chosen distance from the entry, and the order ratchets in the direction of the trade by a fixed amount or a percentage. The order never moves backward, which is what makes it lock in profit while the position is open.
What a trailing stop does
A trailing stop is a stop-loss order that moves with the price, in the direction of the trade, by a fixed amount or a percentage. The order starts at a chosen distance from the entry, and as the price moves in the favourable direction, the order follows. The order never moves backward, so the trailing stop locks in profit when the price has moved in the trader's favour.
The order is useful when the trader wants to ride a trend without setting a fixed target. The trader chooses the trail distance, and the broker takes care of moving the stop. The position stays open as long as the price moves in the favourable direction, and the position closes when the price reverses by the trail distance.
Fixed-amount vs percentage trails
The two main flavours are fixed-amount trails and percentage trails. A fixed-amount trail uses a dollar or point distance, like 2 dollars per share for a US stock. A percentage trail uses a percentage of the current price, like 5 percent.
The choice depends on the trader's preference and the stock's volatility. A high-volatility stock needs a wider trail to avoid being stopped out by the daily noise, and a low-volatility stock can use a tighter trail. A percentage trail automatically widens as the price rises and tightens as the price falls, which adapts the trail to the volatility regime.
Step-by-step setup
The first step is to open the order entry ticket on the platform. The trader selects the "trailing stop" order type from the dropdown. The platform then asks for the trail distance, which is the trigger for the stop to follow the price.
The next step is to choose the trail unit. The platform offers the distance in points, in dollars, or in percentage, depending on the broker. The trader enters the value, and the platform calculates the initial stop level from the entry.
The third step is to set the time in force. Day orders expire at the close, and good-till-cancelled orders stay active until the position is stopped out or the trader cancels. The choice depends on the trading horizon.
Where the order is supported
The order is standard on most retail platforms. MetaTrader 4 and 5 support trailing stops on every position, and the trader can set the trail by a fixed number of points. TradingView, TradeStation, Interactive Brokers' Trader Workstation, and the proprietary platforms from discount brokers all support trailing stops with both fixed-amount and percentage trails.
The order is not always available on mobile apps. The reason is that the trail is calculated server-side, and the mobile app may not have the trail feature enabled. Traders who want the order on mobile should check the broker's mobile app documentation or set the order up on the desktop platform.
Common mistakes
A frequent mistake is to set the trail too tight, which gets the position stopped out by the daily noise. The trail should be wider than the average daily range of the stock, and the trader should check the 14-day average true range before placing the order.
Another mistake is to assume the trailing stop moves both directions. The trailing stop only moves in the favourable direction, and the order never moves back. The trader should not expect the stop to widen when the price reverses.
A third mistake is to set the trail on a stock that has just had a gap, because the gap moves the stop by the same percentage, and the new stop level may not match the trader's risk tolerance. The trader should reset the stop after a gap, or avoid the trailing stop on stocks that are known to gap.
Common questions about trailing stops
Is a trailing stop the same as a stop-loss? No. A stop-loss is a fixed order, and a trailing stop is a moving order. The trailing stop starts at a fixed level and follows the price, and the stop-loss stays at the same level.
Can I use a trailing stop on short positions? Yes. On a short position, the trailing stop moves downward as the price falls, and the stop triggers when the price rises by the trail distance. The behaviour mirrors the long position.
What is the difference between a trailing stop and a trailing stop limit? A trailing stop triggers a market order when the price reaches the stop level. A trailing stop limit triggers a limit order, and the limit order may not fill if the price moves past the limit. The trailing stop is more likely to fill, and the trailing stop limit gives the trader more control over the fill price.
Related resources
Where to start
If you are evaluating trailing stops, the most useful first step is to choose a stock with a clear trend, to set the trail at one to two times the 14-day average true range, and to monitor the position for one to two weeks to see how the order behaves. Our broker comparison lists the brokers that support trailing stops and the trail options, which together tell you what the platform looks like before you set the first trailing stop on a live position.