What is a trailing stop?
A trailing stop is a type of stop‑loss order that moves in the direction of a profitable trade, locking in gains while allowing the position to run. Instead of setting a single fixed exit price at the time of entry, you choose a distance — expressed in pips, points or percent — and the stop level follows the market at that distance as the price moves in your favor. If the market reverses by that distance, the stop is triggered and your position is closed (or an exit order is sent), preserving the profit you have built up to that point.
In forex, where prices are quoted in pips and moves can be fast, a trailing stop helps you manage an open position without adjusting the stop manually every time the pair moves. For a long trade the trailing stop marches upward as the exchange rate rises; for a short trade it marches downward as the rate falls. If the market slips back, the trailing stop does not move further in the losing direction — it freezes at its last level and will trigger when price reaches it.
How a trailing stop works — step by step
Imagine you buy EUR/USD at 1.1000 and set a trailing stop of 30 pips. Your initial stop is therefore at 1.0970 (1.1000 minus 30 pips). If the pair rallies to 1.1040, the trailing stop will move up to 1.1010 (the new high minus 30 pips). If the pair keeps rising to 1.1110, the stop moves to 1.1080. If the market then reverses and drops to 1.1080, the trailing stop triggers and your position is closed — you leave with a profit roughly equal to the difference between your entry and the executed exit price. Conversely, if the market instead falls immediately after entry and hits 1.0970, you are stopped out for a loss defined by that original 30‑pip distance.
For a short position the logic is symmetrical. If you short GBP/USD at 1.3000 with a 40‑pip trailing stop, your initial stop is 1.3040. When price falls to 1.2920 the stop drops to 1.2960, and so on. The trailing stop always preserves the maximum favorable excursion less the set distance.
Different platforms implement the mechanics differently: some update the stop only on new ticks or last trade price, some use bid/ask depending on side, and some submit a market order when the stop is hit while others can use stop‑limit. It’s important to know how your broker handles triggers and execution.
Common methods for setting a trailing stop
Traders typically pick a trailing method that suits their strategy and the current market environment. A simple fixed pip trail is easy to use on short timeframes: for example, scalpers might choose a small pip distance to protect tiny profits. A percentage trail makes more sense on longer‑term positions where price levels are larger. Volatility‑based trails, such as ATR (Average True Range) multiples, widen the stop in choppy, high‑volatility markets and tighten in calm markets; a rule of thumb is to set the trail at 1.5–3 × ATR depending on how much “noise” you want to absorb. Other traders trail using technical levels — moving averages, previous swing highs/lows, or market structure (raising the stop to the most recent higher low in an uptrend) — which ties the exit to price behaviour rather than an arbitrary distance.
You can also trail manually: move your stop to breakeven after a certain profit threshold, then trail it behind subsequent swing lows or moving averages. Automated trailing, either via built‑in platform orders or an Expert Advisor / script, handles the task for you and can be useful when you cannot watch the market constantly.
When to use trailing stops
Trailing stops are most useful in trending markets where the goal is to let winners run while protecting gains when the trend ends. If your strategy seeks large directional moves, a trailing stop can prevent giving back all profits when a reversal happens. They are less suitable in sideways or very noisy markets, because frequent whipsaws will likely hit tight trailing stops and produce a sequence of small losses or small winners.
Timeframe matters: intraday traders typically use tight pip trails, swing traders may prefer ATR or structure‑based trails, and position traders might rely on percentage trails or weekly moving averages. Always match the trailing distance to the instrument’s volatility and your time horizon.
Practical examples and a small plan you can test
A pragmatic approach is to combine an initial fixed stop with a method for trailing. For example, risk 1% of your account on entry with an initial stop placed under recent structure. When the trade reaches +2R (twice your risk), move the stop to break‑even. After that, switch to a volatility‑based trail such as 1.5 × 14‑period ATR. This sequence locks in the initial risk, removes downside exposure at breakeven, and then uses market volatility to give the trade room to run.
Another simple test: on a 1‑hour chart, buy when price breaks above a clear resistance, set an initial stop 40 pips below entry, and set a trailing stop of 30 pips. Track the result over 20 trades to see how many times you capture large moves versus how often you get whipsawed.
Always size positions so that the stop distance corresponds to your risk per trade. If a 200‑pip trailing distance would exceed your risk tolerance, reduce position size accordingly rather than tightening the stop into a level that makes the trade fragile.
Risks and caveats
Trailing stops can help with discipline, but they are not a guarantee. In fast news events, weekend gaps or illiquid periods, the execution price can be materially worse than the trigger price because many trailing stops convert into market orders. Slippage is therefore a real possibility. Different brokers and platforms also treat trailing orders differently — some trail on last trade price, others on bid/ask — which changes when the stop moves and when it fires. In heavily ranged markets, trailing stops can repeatedly close and reopen positions or lock in small profits while missing larger swings. Finally, algorithmic or institutional activity can create sharp spikes that take out stops before a trade resumes in the original direction; this is part of market risk.
Because of these issues, do not rely on trailing stops alone for risk management. Combine them with sensible position sizing, awareness of economic calendar events, and knowledge of how your broker executes stop and trailing orders. Remember that trading carries risk and past patterns don’t guarantee future outcomes; this information is educational and not personalised advice.
Key takeaways
- Trailing stops are dynamic stop‑losses that move with a winning trade to lock in profits while letting winners run.
- Choose the trailing distance to match the pair’s volatility and your timeframe — methods include fixed pips, percentage, ATR multiples, moving averages or market structure.
- Trailing stops help discipline exits but can suffer slippage, gaps, and whipsaws; always test a method and size positions to risk tolerance.
- Trading carries risk; this article is educational only and not personal financial advice.
References
- https://www.schwab.com/learn/story/trailing-stop-orders-mastering-order-types
- https://acy.com/en/market-news/education/trailing-stop-loss-strategy-144647/
- https://www.youtube.com/watch?v=-OvNxFVarX4
- https://www.investopedia.com/terms/t/trailingstop.asp
- https://www.youtube.com/watch?v=WsZk2-sFdz4
- https://www.interactivebrokers.com/campus/trading-lessons/trailing-stop/
- https://www.tastyfx.com/help-and-support/orders-stops-and-limits/what-is-a-trailing-stop-and-how-do-i-use-it/