what is a trailing stop 
a trailing stop is a modification of a typical stop order that can be set at a defined percentage or dollar amount away from a security s current market price for a long position an investor places a trailing stop loss below the current market price for a short position an investor places the trailing stop above the current market price a trailing stop is designed to protect gains by enabling a trade to remain open and continue to profit as long as the price is moving in the investor s favor the order closes the trade if the price changes direction by a specified percentage or dollar amount a trailing stop is typically placed at the same time the initial trade is placed although it may also be placed after the trade investopedia xiaojie liuunderstanding a trailing stoptrailing stops only move in one direction because they are designed to lock in profit or limit losses if a 10 trailing stop loss is added to a long position a sell trade will be issued if the price drops 10 from its peak price after purchase the trailing stop only moves up once a new peak has been established once the trailing stop has moved up it cannot move back down 1a trailing stop is more flexible than a fixed stop loss order as it automatically tracks the stock s price direction and does not have to be manually reset like the fixed stop loss investors can use trailing stops in any asset class assuming the broker provides that order type for the market being traded trailing stops can be set as limit orders or market orders trading with trailing stop ordersthe key to using a trailing stop successfully is to set it at a level that is neither too tight nor too wide placing a trailing stop loss that is too tight could mean the trailing stop is triggered by normal daily market movement and thus the trade has no room to move in the trader s direction a stop loss that is too tight will usually result in a losing trade albeit a small one a trailing stop that is too large will not be triggered by normal market movements but it does mean the trader is taking on the risk of unnecessarily large losses or giving up more profit than they need to while trailing stops lock in profit and limit losses establishing the ideal trailing stop distance is difficult there is no ideal distance because markets and the way that stocks move are always changing despite this trailing stops are effective tools every exit method has its pros and cons the ideal trailing stop loss will change over time during more volatile periods a wider trailing stop is a better bet during quieter times or in a very stable stock a tighter trailing stop loss may be effective that said once a trailing stop loss is set for an individual trade it should be kept as is a common trading mistake is to increase risk once in a trade in order to avoid losses this is called loss aversion disposition effect in the context of markets and it can cripple a trading account quickly 2example of a trailing stopassume you bought alphabet inc goog at 100 by looking at prior advances in the stock you see that the price will often experience a pullback of 5 to 8 before moving higher again these prior movements can help establish the percentage level to use for a trailing stop choosing 3 or even 5 may be too tight even minor pullbacks tend to move more than this which means the trade is likely to be stopped out by the trailing stop before the price has a chance to move higher choosing a 20 trailing stop is excessive based on the recent trends the average pullback is about 6 with bigger ones near 8 a better trailing stop loss would be 10 to 12 this gives the trade room to move but also gets the trader out quickly if the price drops by more than 12 a 10 to 12 drop is larger than a typical pullback which means something more significant could be going on mainly this could be a trend reversal instead of just a pullback using a 10 trailing stop your broker will execute a sell order if the price drops 10 below your purchase price this is 90 if the price never moves above 100 after you buy your stop loss will stay at 90 if the price reaches 101 your stop loss will move up to 90 90 which is 10 below 101 if the stock moves up to 125 your broker will execute an order to sell if the price falls to 112 50 if the price starts falling from 125 and does not go back up your trailing stop order stays at 112 50 and if the price drops to that price the broker will enter a sell order on your behalf 