What is Trailing stop?
In short
A stop that follows price as it moves in your favour — for example, always 5% below the highest price reached.
A trailing stop is a stop-loss that follows the price as it moves in your favour. You set it a certain distance from the price (as a percentage or in dollars). When the price rises, the stop rises too; when the price falls, the stop stays put. Once the price pulls back that distance from its high, the stop triggers and the position is closed.
Formula
For a long position:
- Percentage: Stop = Highest price × (1 − distance%)
- Dollar: Stop = Highest price − distance $
"Highest price" is the highest price reached since the position was opened. The stop only ever moves up, never down.
Why it is useful
A trailing stop lets you "let profits run" while protecting part of them. If the trend continues, you stay in; if it breaks, you exit automatically. You do not have to move the stop by hand every day, which cuts down on emotional decisions.
Limitations
- Choosing the distance is hard. Too tight and it triggers on normal daily swings; too wide and it gives back much of the profit. Many traders size the distance to the stock's volatility, for example its ATR.
- No protection from gaps. A trailing stop usually becomes a market order when triggered; if the price jumps past the stop, it sells lower.
- Extended hours. At many brokers trailing stops only work in the regular session.
Price rose from $50 to $60 while the stop followed 5% below each new high like a staircase: from $47.50 up to $57.00. When price fell back to $57 the position closed — locking in roughly +14%.
After each new higher low (HL) is confirmed, the stop moves to $0.20 below it: $19.60 → $20.80 → $22.20 → $23.40. When price broke the last HL the position closed at $23.40: +$2.90, about +3.2R. The peak was $26 — a trailing stop gives some profit back in exchange for riding the trend.
Example
You buy 100 shares of a fictional stock at $100 and set a 5% trailing stop.
- Starting stop: $100 × 0.95 = $95.
- The price rises to $110 → stop $110 × 0.95 = $104.50.
- The price rises to $120 → stop $120 × 0.95 = $114.
- The price dips to $116 → the stop stays at $114 (it does not move down).
- The price falls to $114 → the stop triggers and the position sells at about $114.
Result: ($114 − $100) × 100 = $1,400 profit, or 14%. Given that the price pulled back 5% from its high, you captured most of the move. Had the price never risen, the exit would have been at $95 — a $500 loss.
Mistakes and tips
Choose the distance from the stock's normal swings, not a "nice" number (5%, 10%): a 3% trailing stop on a stock that moves 4% a day will be hit quickly.
One approach is to switch the trailing stop on only after the trade is in profit — a fixed stop first, then breakeven, then trailing.
A trailing stop does not guarantee profit: size smaller before earnings and whenever a gap is likely.
Test different distances on a demo account and record the results in your trading journal — that shows which distance suits your style.
Frequently asked questions
- What percentage should a trailing stop be?
- There is no universal number. The distance depends on the stock's volatility and your holding period: tighter for short-term trades, wider for long trends.
- Does a trailing stop move down as well?
- No. On a long position it only moves up when the price makes a new high, and stays put when the price falls.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
- How the US market worksExchanges and brokers, sessions in Tashkent time, spread and liquidity, five order types with examples, T+1, costs and fractional shares.Open lesson · 12 min
- Stop-loss: admitting you're wrong in timeWhere to put the stop (structure and ATR), which types exist, gaps and slippage, trailing methods, the pros and cons of moving to breakeven, and the costliest mistakes.Open lesson · 11 min
- Demo trading: practice without money, but seriouslyMaking demo realistic, a 30-day plan, which numbers to track and when to move to real money.Open lesson · 11 min
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