Understanding Trailing Stop Order: How It Works and When to Use It

One of the challenges of investing is knowing when to exit a position. Sell too early and you may miss further gains. Wait too long and you risk giving back everything you earned.

A trailing stop order is a tool designed to solve exactly this problem. It helps protect your profits while keeping you invested as long as the trade is moving in your favor.

What Is a Trailing Stop?

A trailing stop is a type of stop-loss order that automatically adjusts as the price of an asset moves in your favor.

Unlike a regular stop-loss, which is fixed at a specific price, a trailing stop loss follows the price upward and only locks in if the price reverses by a set amount. Once triggered, it closes your position automatically.

For example:

• You buy a stock at $100.
• You set a trailing stop of $10.
• The stock rises to $130. Your trailing stop moves up to $120.
• The stock then falls to $120. Your position is closed automatically.
• You exit at $120 instead of $100, locking in a $20 gain per share.

The trailing stop never moves downward. It only adjusts upward as the price climbs, protecting more of your profit the higher the stock rises.

How Trailing Stops Work

When you place a trailing stop order, you define the trailing amount. This is the distance the price must fall from its peak before the order is triggered.

Here is the basic flow:

• You enter a trade and set your trailing stop.
• As the price rises, the trailing stop rises with it, always maintaining the same distance from the peak.
• If the price falls by the trailing amount from its highest point, the order triggers and your position is closed.
• If the price continues to rise without reversing, the trailing stop keeps moving up and the order never triggers.

The key principle is that the trailing stop only follows in one direction. It rises with gains but never drops back down, which is what makes it an effective profit protection tool.

Fixed vs Percentage Trailing Stops

There are two main ways to set a trailing stop, and each suits different situations.

Fixed trailing stop

A fixed trailing stop is set as a specific dollar or point amount below the current price.

For example:

• You buy a stock at $50 and set a fixed trailing stop of $5.
• If the stock rises to $70, the stop sits at $65.
• If the price drops to $65, the order triggers.

Fixed trailing stops work well when you have a clear price level in mind or when you are trading a stock with a known average daily price range.

Percentage trailing stop

A percentage trailing stop is set as a percentage of the current price rather than a fixed amount.

For example:

• You buy a stock at $50 and set a 10% trailing stop.
• If the stock rises to $100, the stop sits at $90.
• If the price drops to $90, the order triggers.

Percentage trailing stops automatically scale with the price, which makes them more flexible for volatile stocks or longer holding periods. As the stock price grows, the stop adjusts proportionally rather than remaining at a fixed dollar gap.

Advantages and Drawbacks

Like any tool in trading, trailing stops come with both benefits and limitations.

Advantages

1. Automated profit protection. Once set, a trailing stop works without you needing to monitor the position constantly. It removes the need to make a real-time exit decision under pressure.
2. Lets profits run. Unlike a fixed take-profit order, a trailing stop does not cap your upside. The position stays open as long as the price keeps rising.
3. Removes emotional decision-making. Having a predefined exit rule makes it easier to stick to your strategy rather than reacting to short-term market noise.
4. Works in both volatile and trending markets. Trailing stops are especially useful in trending conditions where the goal is to stay invested for as long as the trend continues.

Drawbacks

• Normal volatility can trigger early exits
  In choppy markets, prices often swing up and down within a normal range. A trailing stop set too tight may close your position during a temporary dip, only for the price to recover and continue higher.
• No guarantee of execution at the exact trigger price
  In fast-moving markets, the actual exit price may differ slightly from where the trailing stop was set. This is known as slippage.
• Requires careful calibration
  Setting the trailing distance too tight leads to early exits. Setting it too wide may result in giving back a large portion of your gains before the order triggers.

When Trailing Stops Work Best

Trailing stops are most effective in specific market conditions and with certain trading approaches.

In trending markets

When a stock or asset is in a clear uptrend, a trailing stop allows you to ride the move and exit automatically when the trend shows signs of reversing.

For long-term positions

Investors holding stocks over weeks or months can use wider trailing stops to stay invested through normal fluctuations while still having a defined exit if the trend breaks.

When you cannot monitor the market actively

Trailing stops are particularly useful for investors who do not watch prices every hour. The order manages the exit on your behalf.

After a significant gain

Once a position has moved substantially in your favor, a trailing stop helps protect the majority of those gains without forcing you to decide on an exact exit price in advance.

Trailing stops are less effective in sideways or highly volatile markets where prices frequently reverse without establishing a clear direction.

Conclusion

A trailing stop order is one of the most practical tools available to investors who want to protect profits without capping their upside. By automatically adjusting with the price, it removes the need to time your exit perfectly.

Understanding the difference between fixed and percentage trailing stops, and knowing when to apply each, allows you to use this tool more effectively. Like all trading tools, a trailing stop loss works best when combined with a clear entry strategy and a realistic understanding of how the underlying asset behaves.

FAQ

What is a trailing stop order?

A trailing stop order is a dynamic stop-loss that moves upward as the price of an asset rises. It triggers automatically if the price falls by a set amount from its peak, locking in gains without requiring a manual exit.

What is the difference between a trailing stop and a regular stop-loss?

A regular stop-loss is fixed at a specific price. A trailing stop adjusts upward as the price rises, offering more flexibility and better profit protection in trending markets.

How do I choose the right trailing stop distance?

Consider the stock's average daily price movement and your holding period. A stop set too tight may trigger on normal volatility. A stop set too wide may give back too much profit before triggering.

References

• Investopedia, Trailing Stop What They Are, How to Use Them in Trading, 2026.
• IG Group, Trailing Stops Explained, 2026.