It follows price when price goes right:and holds its ground when things turn tight.
A dynamic stop-loss order that moves with the market price at a fixed distance.
As the price moves in your favour, the stop follows; if the price reverses, the stop remains in place to protect profits.
In plain words
A trailing stop is a stop loss that follows the price at a set distance when the price moves in the trader’s favour, and stays where it is when the price moves back. It only ever moves in one direction: towards locking in more of the gain.
See it move
Price and Trailing stop move together, the same distance apart
Why it matters
It allows a position to stay open while a move continues, without a fixed target, and closes it once the price gives back a set amount. On some platforms the trailing is done by the trader’s own software and stops working if that software is closed or disconnected.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
A trader buys one standard lot of EUR/USD at 1.1000 with a trailing stop of 30 pips.
- 1At the start the stop is at 1.1000 − 0.0030 = 1.0970.
- 2The price climbs to 1.1050, and the stop follows to 1.1050 − 0.0030 = 1.1020.
- 3The price drops back to 1.1020 and the stop is triggered1.1020 − 1.1000 = 20 pips, or 200 US dollars.
The trade closes with a gain of 200 US dollars, 30 pips below its best point, if the stop is filled at its price.
A common mistake
A trailing stop does not capture the best price of a move. By design it closes the position after the price has already come back by the trailing distance, and like any stop it can be filled at a worse price.
Check yourself
Learn more
- Deep DiveThe psychology of trading: five biases and what to do about themFear, greed, overconfidence, confirmation bias and loss aversion each leave a recognisable mark on a trading record. Naming them is the first step to noticing them.
- GuideTen common trading mistakes and how they happenNo plan, too much leverage, no stop, too many trades: the errors are well known and still routinely made. Each is described here with the habit that guards against it.
Educational information, not investment advice or a recommendation to trade.