Introduction
How to use trailing stop orders is one of the most common questions among traders who want to balance risk management with maximizing profit potential. A trailing stop order is a powerful tool that automates exit strategies by following price movements. Unlike a standard stop-loss, which stays fixed at one level, a trailing stop moves with the market—helping traders secure gains while still giving the trade room to breathe.
In this guide, we’ll explain exactly how trailing stop orders work, when to use them, the differences between trailing stop-loss and trailing stop-limit orders, practical examples, risks, and pro-level tips.
What Is a Trailing Stop Order?
A trailing stop order is a type of conditional stop order that automatically adjusts based on a stock, ETF, forex pair, or crypto’s market movement. Instead of choosing a fixed stop price, you set an offset (percentage or dollar amount) from the current price.
- For long positions: the trailing stop “follows” the price upward. If the price rises, the stop price rises as well, maintaining the set offset. If the price falls, the stop remains fixed until triggered.
- For short positions: the trailing stop moves downward as prices fall, protecting profit on the short side.
Once the trailing stop price is reached, the order is triggered:
- Trailing stop-loss order → Converts to a market order.
- Trailing stop-limit order → Converts to a limit order at a predefined offset.
How Trailing Stops Differ from Regular Stop Orders
A regular stop-loss order is static—you must manually adjust it if the price moves in your favor. This can lead to missed opportunities.
Example:
- You buy stock XYZ at $140 and place a stop-loss at $125.
- Price rises to $160, but your stop remains at $125 unless you manually adjust.
- If price falls back to $140, you miss the chance to secure profits between $140–160.
A trailing stop, however, adjusts automatically:
- Buy at $140, set trailing stop $10 below price.
- If price rises to $160, stop rises to $150.
- If price falls to $150, the stop is triggered and executes, locking in $10 profit.
Types of Trailing Stop Orders
1. Trailing Stop-Loss Order
- Triggered when price moves against your position by the set offset.
- Becomes a market order, executing at the best available bid/ask.
- Advantage: High likelihood of execution.
- Risk: Fill may be worse than expected in volatile markets.
2. Trailing Stop-Limit Order
- Adds a limit price to the trailing stop.
- Triggered stop converts to a limit order at your defined limit offset.
- Advantage: You set the worst acceptable execution price.
- Risk: If price gaps past your limit, the order may never execute.
How to Set a Trailing Stop Order
- Choose your offset method:
- Percentage (e.g., 10% below current price).
- Dollar amount (e.g., $5 below current price).
- Select order type:
- Trailing stop-loss → Market execution.
- Trailing stop-limit → Limit execution with additional control.
- Place the order through your broker’s trading platform. Many allow customization for day-only or good-’til-canceled (GTC) duration.
- Monitor execution: trailing stops are not foolproof. Fast markets, gaps, and illiquidity can cause slippage.
Practical Examples
Example 1: Long Position with Dollar Offset
- Buy ABC at $50.
- Set $5 trailing stop.
- Price rises to $70 → stop rises to $65.
- Price falls to $65 → stop triggers, order executes.
- Profit secured: $15 per share.
Example 2: Long Position with Percentage Offset
- Buy XYZ at $100.
- Set 10% trailing stop.
- Price rises to $150 → stop rises to $135.
- Price falls to $135 → stop triggers, order executes.
- Profit secured: $35 per share.
Example 3: Short Position
- Short sell LMN at $200.
- Set 5% trailing stop (above price).
- Price drops to $180 → stop moves to $189.
- Price rebounds to $189 → stop triggers, buy order executes.
- Profit secured: $11 per share.
Advantages of Trailing Stop Orders
- Protects profits while giving trades room to run.
- Automates risk management → no constant manual adjustments.
- Reduces emotional bias → decisions are rules-based.
- Versatile → works for stocks, ETFs, forex, futures, and crypto.
- Good for trend-following strategies.
Risks and Limitations of Trailing Stop Orders
- Market Gaps: If price gaps below/above your stop, execution may occur at a worse level.
- Fast Markets: High volatility can trigger stops prematurely.
- Liquidity Issues: In thinly traded securities, execution may be partial or unfavorable.
- After-Hours Restrictions: Most brokers only execute trailing stops during normal sessions (9:30 a.m.–4 p.m. ET).
- False Signals: Tight stops may result in being stopped out by normal market noise.
Pro Tips for Using Trailing Stops Effectively
- Adjust for volatility: Use wider offsets in volatile stocks to avoid premature exits.
- Combine with indicators: Align trailing stops with moving averages or ATR (Average True Range) for dynamic placement.
- Set different rules for swing vs day trading: Swing traders often use wider trailing stops; day traders may prefer tighter ones.
- Avoid illiquid securities: Wide bid-ask spreads can cause poor fills.
- Review order duration: Use GTC orders if you want trailing stops active beyond the current session.
Trailing Stops vs. Other Exit Strategies
| Feature | Regular Stop-Loss | Trailing Stop | Trailing Stop-Limit |
|---|---|---|---|
| Adjusts automatically? | ❌ No | ✅ Yes | ✅ Yes |
| Execution Type | Market/Limit | Market | Limit |
| Best for | Fixed protection | Trend-following | Precision exit |
| Risk of missed trade | Low | Medium | High (gap risk) |
FAQs on Trailing Stop Orders
Q1. Do trailing stop orders work after-hours?
Generally no—they trigger only during standard market hours unless your broker explicitly supports extended hours.
Q2. Are trailing stops good for day trading?
Yes, but traders often use tighter offsets. Be cautious of volatility triggering premature exits.
Q3. Can I use trailing stops in crypto trading?
Yes. Many crypto exchanges allow trailing stops, though execution quality may vary due to 24/7 trading and liquidity conditions.
Q4. How far should I set my trailing stop?
It depends on volatility, time frame, and strategy. Swing traders may use 10–15%, while day traders may use 1–3%.
Q5. Are trailing stops suitable for all assets?
They work best for trending assets with high liquidity. Avoid illiquid stocks or rangebound markets.
Conclusion
Knowing how to use trailing stop orders can dramatically improve your trading discipline and profitability. They provide a powerful “set-it-and-forget-it” exit strategy that protects your downside while locking in upside gains. However, like any tool, they must be applied wisely—considering volatility, liquidity, and market conditions.
When used properly, trailing stops allow traders to ride trends with confidence, secure profits without constant manual adjustments, and remove emotion from critical exit decisions.
