What is a trailing stop?
In one line: A trailing stop is a stop loss that follows price by a set distance as the trade moves your way, and stays put when price moves against you.
A simple example
You buy at $50 with a trailing stop $2 below price.
| Price reaches | Stop sits at |
|---|---|
| $50 (entry) | $48 |
| $53 | $51 |
| $56 | $54 |
| Falls to $55 | still $54 |
| Falls to $54 | stop triggers |
The stop only ever moves up for a buy (down for a sell). Here it started risking $2 a share. By the end it was protecting $4 a share above your entry.
That's a math example, not a promise. Price could just as easily have dropped to $48 first.
Fixed amount, percent or chart-based
- Fixed amount: "$2 behind price."
- Percent: "5% behind price." The gap grows as price rises.
- Chart-based: you move the stop by hand to just past each new higher low in an uptrend (each new low that sits above the last one). This is how many structure traders trail.
A fixed or percent trail ignores the chart. A chart-based trail follows the last places price turned around, which tends to give the trade room to breathe. The ATR can help you pick a distance that fits how much the market usually moves.
Why it matters
A trailing stop lets a trade run without you guessing the top. It also shrinks your risk as the trade works.
A common mistake
Trailing too tight. A $0.20 trail on a stock that wiggles $1 a day will get you out on normal noise. Then price carries on without you. Match the trail to the market's normal swing.
Also know: a trailing stop is still a stop. If price gaps past it overnight, it fills at the next available price, which can be worse. That's Slippage.
More on the trade-offs in trailing stop vs stop loss.
Questions
Is a trailing stop better than a regular stop loss?
Neither is better everywhere. A fixed stop keeps the plan simple. A trailing stop can protect gains as a trend runs but may exit on normal pullbacks. Many traders start with a fixed stop.
What is a good trailing stop percentage?
There's no single number. It depends on how much the market normally moves. A trail smaller than the usual daily swing tends to get hit by noise.
Does a trailing stop work after hours?
It depends on your broker. Many only trigger stops during regular hours, so a move after the close can gap past it by the next open.
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