One of the most frustrating experiences in trading is watching a profitable trade turn into a loss. You had gains, you could have exited, but you held on hoping for more. Trailing stops solve this problem by automatically protecting your profits while giving winning trades room to continue higher.
What is a Trailing Stop?
A trailing stop is a stop loss that moves with the price in your favor but stays in place when price moves against you. For a long position, the trailing stop rises as the stock rises but does not fall when the stock falls. This locks in progressively more profit while still allowing the trade to run.
Unlike a fixed stop that sits at a static price, a trailing stop is dynamic. It follows the market, protecting gains automatically without requiring you to monitor the position constantly.
Example: You buy a stock at $50 with a trailing stop of $3. The stop is initially at $47. As the stock rises to $55, your stop rises to $52, locking in $2 profit. If the stock then drops, you exit at $52 instead of riding it all the way back down.
Why Trailing Stops Matter
Capture the Bulk of Moves
Trending stocks can move much further than expected. A trailing stop keeps you in during the trend while exiting when momentum reverses. You may not exit at the exact top, but you capture most of the move.
Remove Emotional Decision Making
Without a trailing stop, you must decide when to exit a winning trade. Greed says hold for more. Fear says take profits now. A trailing stop removes this emotional burden by making the exit automatic.
Protect Against Reversals
Markets can reverse quickly. A trailing stop ensures you are out before a minor pullback becomes a major reversal that erases all your gains.
Types of Trailing Stops
Percentage-Based Trailing Stop
The stop trails at a fixed percentage below the highest price reached. Simple to understand and implement.
- How it works: If you set a 5% trailing stop and the stock hits $100, your stop is at $95. If the stock rises to $110, your stop rises to $104.50.
- Best for: Swing traders who want simplicity
- Typical range: 3% to 10% depending on volatility
Dollar-Based Trailing Stop
The stop trails at a fixed dollar amount below the highest price. Works well for consistent position sizing.
- How it works: A $3 trailing stop always stays $3 below the highest price
- Best for: Traders who think in dollar terms
- Consideration: The percentage changes as price moves
ATR-Based Trailing Stop
The stop trails at a multiple of Average True Range (ATR). This adjusts automatically for volatility, giving volatile stocks more room.
- How it works: If ATR is $2 and you use 2x ATR, your stop trails $4 below the high
- Best for: Technical traders, multiple stock strategies
- Typical range: 1.5 to 3 times ATR
ATR Trailing Stop Formula:
Stop Level = Highest High - (ATR x Multiplier)
For a stock at $100 high with 14-day ATR of $3 and 2x multiplier:
Stop = $100 - ($3 x 2) = $94
Swing Point Trailing Stop
The stop trails below the most recent swing low (for longs) or above the most recent swing high (for shorts). This respects market structure.
- How it works: As new higher lows form, move your stop just below each one
- Best for: Trend-following traders
- Advantage: Based on actual price action, not arbitrary numbers
Moving Average Trailing Stop
The stop follows a moving average, such as the 20-day or 50-day MA. Exit when price closes below the average.
- How it works: Trail below the moving average, exit if price closes below
- Best for: Longer-term trend trades
- Consideration: Works better in trending markets, whipsaws in choppy markets
Position Management Rules for Trailing Stops
Rule 1: Do Not Trail Too Tight
A stop that is too close gets triggered by normal market noise. Give the trade room to breathe. If you are constantly getting stopped out just before the stock continues in your direction, your trailing stop is too tight.
Rule 2: Wait for Profit Before Trailing
Do not start trailing from entry. Let the trade develop first. A common approach is to start trailing only after price reaches your first target or after a minimum percentage gain.
Rule 3: Trail Only in the Direction of Your Trade
For long positions, the stop only moves up. For shorts, only down. Never move a trailing stop backwards, as this defeats the entire purpose.
Rule 4: Use Different Trailing Methods for Different Phases
Consider using a wider trail early in the trade and tightening as you approach targets. This gives the trade room to develop while protecting large gains.
When to Start Trailing
Starting the trail too early cuts winners short. Starting too late leaves profits unprotected. Common triggers include:
- After reaching 1R profit: Once you have gained an amount equal to your initial risk
- After breakeven: Once you can move stop to breakeven, start trailing from there
- After first target: Reach your first target, take partial profits, trail the rest
- After confirmation: Wait for the trend to confirm before trailing
Automate Your Trailing Stops
Pro Trader Dashboard helps you track positions and know exactly when to adjust your stops based on your trading rules.
Common Trailing Stop Mistakes
1. Using the Same Trail for All Stocks
A 5% trailing stop works differently on a volatile tech stock versus a steady utility stock. Adjust your trail distance based on the specific security's volatility.
2. Moving Stop Backwards
Never widen your trail or move it back down. If you feel the need to do this, your original trail was too tight. Accept being stopped out and learn for next time.
3. Not Accounting for Gaps
Trailing stops do not protect against gaps. A stock can gap through your stop, resulting in worse execution than planned. Consider this risk for overnight holds.
4. Trailing Too Aggressively
Some traders trail after every small move up, creating a stop that is easily triggered. Trail at meaningful intervals, not every tick.
Trailing Stop Example Strategy
Here is a complete trailing stop strategy for swing trades:
Entry to 1R Profit
Keep initial stop in place. Do not trail yet. Focus on letting the trade develop.
1R to 2R Profit
Move stop to breakeven. Begin trailing using 2x ATR below the highest close.
2R and Beyond
Tighten trail to 1.5x ATR. The larger gains justify tighter protection.
Near Major Resistance
Tighten trail further or take profits. Do not let a big win evaporate at obvious resistance.
Summary
Trailing stops are essential tools for protecting profits while letting winners run. Choose a trailing method that matches your trading style, whether percentage-based, ATR-based, or swing point trailing. Start trailing only after the trade has developed some profit. Never move the stop backwards. Adjust your trail distance based on volatility, and tighten as profits grow.
The goal is not to exit at the perfect top. The goal is to capture the majority of winning moves while protecting against reversals. A well-implemented trailing stop system helps you achieve both.
Learn more: break-even stops and ATR indicator explained.