Trailing Stop
A stop-loss order that automatically adjusts with favorable price movement at a fixed distance, locking in gains while still limiting downside.
A trailing stop is a type of stop-loss order (see Kaavon's "Stop-Loss Order" glossary definition) that moves automatically as the market price moves in the trader's favor, maintained at a fixed distance — either a percentage or a fixed amount — behind the current price, but never moving back against the trader if the price reverses. If the price pulls back far enough to hit the trailing stop level, the order triggers and closes the position, in the same way a standard stop-loss would.
The advantage of a trailing stop over a fixed stop-loss is that it lets a trader capture more of an extended favorable price move without needing to manually adjust the stop level repeatedly, while still providing a defined, automatic exit if the trend reverses. Its main limitation is the same as any stop order: in a fast-moving or illiquid market, the actual execution price can slip past the trigger level (see Kaavon's "Slippage" glossary definition), so a trailing stop limits risk but doesn't guarantee an exact exit price.
Examples
- A 10% trailing stop on a position that has risen 40% will trigger if the price falls 10% from its highest point reached since the stop was set, not 10% from the original entry price.
- Unlike a fixed stop-loss, a trailing stop never moves against the trader — it only tightens as the price moves favorably.