What Is a Trailing Stop Loss? How and When to Use It

A trailing stop loss is a stop order that automatically moves in the direction of your trade as the price advances, locking in profits while still giving the trade room to run. Unlike a fixed stop loss that stays at one price, a trailing stop follows price upward (for longs) or downward (for shorts) and only triggers when price reverses by a specified amount.

How Trailing Stops Work

When you set a trailing stop, you define a trail distance (either in dollars, points, or percentage). The stop follows price in the favorable direction but never moves backward.

Example: You buy a stock at $50 with a $2 trailing stop.

• Stock rises to $52. Trail stop is at $50 (break-even).
• Stock rises to $55. Trail stop moves to $53.
• Stock rises to $57. Trail stop moves to $55.
• Stock drops to $55. Trail stop triggers. You exit at $55 with a $5 profit.

Without the trailing stop, you might have held all the way back down to $50 or worse. The trailing stop captured most of the $7 move while protecting you from the reversal.

Types of Trailing Stops

Fixed dollar/point trail: The simplest type. Set a fixed distance (e.g., $1.50 or 10 points) from the highest price. Easy to calculate but does not adapt to changing volatility.

ATR-based trail: Trail your stop 1.5x to 2x the Average True Range below the highest price. This adapts to the market’s current volatility. When the market is calm, the trail tightens. When it is volatile, the trail widens. This is the most professional approach.

Moving average trail: Trail your stop below a moving average like the 9 EMA, 20 EMA, or 50 SMA. As long as price stays above the moving average, you stay in the trade. When it closes below, you exit. Trend followers love this method.

Percentage trail: Trail a fixed percentage below the highest price (e.g., 5%). This works for longer-term positions and swing trades. Simple but effective.

When to Use a Trailing Stop

Trailing stops work best in certain situations:

Trending markets: When a clear trend is in play, a trailing stop lets you ride the trend without guessing the exit. The market tells you when the trend is over by hitting your trail.

Momentum trades: Strong momentum can carry far beyond what you initially expect. A trailing stop captures these outsized moves instead of exiting at a predetermined target.

After partial profits: Many traders take half their position off at a fixed target (1:1 or 2:1 risk-reward) and trail the rest. This locks in a guaranteed profit while keeping upside exposure.

When NOT to Use a Trailing Stop

Range-bound markets: In a range, price bounces between support and resistance. A trailing stop will get triggered by the normal oscillation. Use fixed targets instead.

Scalping: Scalp trades move too fast and target too little profit for a trailing stop to add value. Fixed profit targets work better.

Very volatile, choppy markets: If the market whips back and forth wildly, trailing stops get triggered frequently by noise. In these conditions, use wider trails (2x ATR) or switch to fixed targets.

Practical Tips

• Do not trail too tight. A $0.25 trail on a stock with $1.50 average daily range will stop you out constantly. Your trail distance should be wider than normal price noise.
• Combine with partial profit-taking. Take 50% off at your initial target and trail the remaining 50%. This gives you the best of both approaches.
• Use the right timeframe. A trail based on the 5-minute chart will be very tight. A trail based on the daily chart gives much more room. Match your trail to your trading timeframe.

Key Takeaways

• A trailing stop moves in your favor and locks in profits as the trade progresses
• ATR-based trails adapt to volatility and are the most professional method
• Moving average trails work well for trend following trades
• Use trailing stops in trending and momentum conditions; use fixed targets in ranges
• Combine trailing stops with partial profit-taking for the best overall results

Frequently Asked Questions

Do all brokers offer trailing stop orders? Most brokers offer basic trailing stop orders. However, ATR-based and moving average trails usually need to be managed manually or through your platform’s automation tools. Some platforms like NinjaTrader and TradingView allow automated trailing stop strategies.

How far should my trailing stop be? At minimum, wider than the normal price noise. Using 1.5x to 2x the ATR is a reliable starting point. Test different trail distances on your historical trades to find what works for your strategy.

Can I use trailing stops with futures contracts? Yes. Trailing stops are very common in futures trading. For ES futures, a 5-10 point trail works for intraday trades, while a 20-30 point trail suits swing trades. Always calibrate to the contract’s volatility using ATR.

Risk Disclaimer: Trading involves substantial risk of loss. Past performance is not indicative of future results. See our full risk disclaimer.