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 order that adjusts as the price moves in your favor. It locks in profits while leaving the position open for further upside. The setup varies by platform, but the logic is the same: a stop-loss that follows the price at a fixed distance.
This article is a practical walkthrough: when trailing stops make sense, how to set them up, and what to watch for.
How a trailing stop works
A trailing stop is a stop order with a "trail" amount. The trail can be:
- A fixed amount. $1 below the current price for a long position, or $1 above for a short.
- A percentage. 5% below the current price for a long position.
- A volatility-based amount. 2× the average true range (ATR) below the current price.
As the price moves in your favor, the trailing stop adjusts to maintain the same distance. As the price moves against you, the trailing stop stays put. If the price hits the trailing stop, the position is closed.
The math: you bought a stock at $100 with a 5% trailing stop. The initial stop is at $95. The price rises to $110; the stop moves to $104.50. The price drops to $104.50; the stop triggers, the position closes at $104.50. The profit is $4.50, locked in by the trailing stop.
If the price never rises above $100, the trailing stop stays at $95. The position is closed if the price hits $95.
When trailing stops make sense
Three common uses:
- Momentum trades. A trader who wants to ride a multi-day move and exit on the reversal. The trailing stop captures the bulk of the move and exits when momentum fades.
- Breakout trades. A trader who enters on a breakout and uses a trailing stop to manage the exit. The trailing stop is set just below the breakout level.
- Long-term position management. A trader who holds a long-term position but wants to protect against a large drawdown. The trailing stop is set at a wide percentage (15-25%) to allow for normal volatility.
How to set up a trailing stop on a typical platform
The exact steps vary by broker, but the structure is the same. On most platforms (thinkorswim, Interactive Brokers, Tastyworks, TradeStation):
- Open the order ticket for the position. Right-click on the position or open a new order.
- Select the order type as "trailing stop." Most platforms have this in the order type dropdown.
- Set the trail amount. Either a fixed amount, a percentage, or a volatility-based amount. The platform converts the percentage or ATR to a dollar amount internally.
- Set the initial stop price (optional). Some platforms let you set a starting price for the trailing stop. The trail kicks in once the price moves in your favor.
- Submit the order. The trailing stop is now active. The platform adjusts the stop as the price moves.
The platform also lets you adjust the trail amount after submission. The stop will adjust based on the new trail amount going forward; existing high-water marks are not reset.
Trailing stop variations
Trailing stop limit
A trailing stop converts to a market order when triggered, which can produce slippage in volatile markets. A trailing stop limit converts to a limit order at a specified price, avoiding slippage but risking non-fill if the price gaps through the limit.
The trade-off: stop-market fills with slippage; stop-limit fills at a specified price or not at all. For most trailing stops, the slippage is small, so the stop-market version is usually fine.
Trailing stop with a step
Some platforms let you set a "step" amount. The stop only adjusts when the price moves at least the step amount. For example, a 5% trailing stop with a 1% step: the stop only adjusts when the price moves 1% or more. This reduces order management overhead in choppy markets.
Time-based trailing stops
Some platforms let you set a time-based trail: the stop only trails during specific hours, or the stop expires at a specific time. Useful for strategies that are only valid during market hours, or for closing positions before earnings.
What can go wrong
Three patterns:
1. The trailing stop triggering on a wick
In a candle wick, the price briefly hits the trailing stop but closes above. A stop-market order triggers on the wick and fills at the stop price (or worse). The position is exited on noise, not on a real reversal.
The fix: use a stop-limit with a buffer, or use a longer time-frame confirmation.
2. The trailing stop adjusting too aggressively
A tight trailing stop (1-2%) in a volatile market adjusts constantly and can be triggered by normal intraday volatility. The position is closed before the move plays out.
The fix: use a wider trail (5-10%) or a volatility-based trail (2-3× ATR). The trail should be wider than the normal daily range.
3. The trailing stop not adjusting in fast markets
In a fast market, the price gaps past the trailing stop. The order fires at the next available price, which can be far from the trail amount. The protection is theoretical; the actual fill is worse.
The fix: accept that trailing stops have gap risk. For gap-prone markets, use a stop-limit or a position size that can absorb a gap.
How to evaluate
When setting up trailing stops, ask:
- Does the platform support true trailing stops? (Test with a small order in a liquid name to confirm the behavior.)
- What trail types are supported? (Amount, percentage, ATR. The more options, the more strategies you can run.)
- Does the platform support stop-market or stop-limit trailing stops? (Stop-market is the default; stop-limit is the safer but less reliable version.)
- What's the expiry default? (Day, GTC, or custom. Set deliberately.)
- Does the platform support a step amount?
FAQ
What's a good trailing stop percentage?
Depends on the volatility. For low-volatility stocks (utilities, consumer staples), 3-5% is reasonable. For high-volatility stocks (small-cap tech, biotech), 10-15% is more appropriate.
Should I use a trailing stop or a profit target?
A trailing stop is for trades where you want to ride the move. A profit target is for trades where you have a specific exit price. If you have a target, use the target. If you want to capture the bulk of a multi-day move, use a trailing stop.
Can I set a trailing stop and a profit target together?
Yes, using an OCO (one-cancels-the-other) order. The trailing stop handles the downside; the profit target handles the upside.
Do all brokers support trailing stops?
Most tier-1 brokers do, including Interactive Brokers, Schwab, Tastyworks, TradeStation, and E*TRADE.
Related resources
Where to start
If you want to use trailing stops in your trading, the practical first step is to set up a paper-trading account with a broker that supports the order type and test the behavior with small positions. The paper account is the only way to verify the platform's trailing stop logic before committing real money. See our broker table for the current list of platforms with trailing stop support.