Trailing Stop
Definition
A trailing stop is a type of stop-loss order that automatically moves in your favour as the market price moves, while staying fixed if the price moves against you. It is designed to protect gains while allowing profits to run. How reliably a trailing stop works depends on market conditions and the broker’s execution and order-handling rules.
In Plain English
In plain terms, a trailing stop is a moving safety net. Instead of setting a fixed exit price, you set a distance from the current price. As the price moves in your favour, the stop follows it. If the market reverses by that distance, the trade is closed, locking in some of the gains.
How It Works
- You open a trade and attach a trailing stop instead of a fixed stop loss.
- You define the trailing distance, either in points, price units, or percentage.
- As the market price moves in your favour, the stop level adjusts automatically.
- If the market pauses or pulls back slightly, the stop remains at its highest (or lowest) level.
- If the market reverses by the trailing distance, the stop is triggered.
- Once triggered, the trailing stop becomes a market order.
- The position is closed at the next available price, which may involve slippage.
- Trailing behaviour depends on whether the stop is managed on the broker’s server or the trading platform.
Why This Matters for Traders
Trailing stops help balance two competing goals: limiting downside risk and capturing upside potential. They are commonly used in trending markets where traders want to stay in profitable positions without manually adjusting stops. However, in choppy or volatile markets, trailing stops can be triggered prematurely, resulting in frequent exits and missed longer-term moves.
Common Misunderstandings
- Trailing stops guarantee profit: they only protect gains once price has moved sufficiently.
- They always trail continuously: some trail in fixed steps rather than tick-by-tick.
- Trailing stops eliminate execution risk: they still execute as market orders.
- All brokers implement trailing stops the same way: platform and server behaviour differs.
- Trailing stops work well in all market conditions: they are most effective in trending markets.
How This Affects Broker Choice
Trailing-stop implementation varies between brokers and platforms. When comparing brokers, users should consider:
• Whether trailing stops are managed server-side or client-side.
• How frequently trailing levels update.
• Whether trailing stops remain active if the platform disconnects.
• How trailing stops interact with spread widening and volatility.
• Transparency in showing trailing-stop adjustments in trade history.
From a monetisation and comparison perspective, trailing-stop support signals platform sophistication and execution reliability, making it relevant to broker reviews and feature comparisons.
Risks & Common Mistakes
• Setting trailing distances too tight, leading to frequent stop-outs.
• Using trailing stops in low-liquidity or range-bound markets.
• Assuming trailing stops will protect against market gaps.
• Not understanding whether trailing stops function when the platform is offline.
• Choosing brokers with limited documentation on trailing-stop behaviour.
Risk note: trailing stops do not guarantee exit prices and can execute at worse levels during fast or gapping markets, especially when leverage is used.
Real-World Example
You buy a CFD at £100 and set a trailing stop 5 points below the price.
• The price rises to £110, and the trailing stop moves up to £105.
• The market then reverses sharply to £104.
The trailing stop triggers and closes the trade near £104, locking in some profit but at a worse price than the stop level due to execution conditions.
What to Check Before Trading
- Does the broker support trailing stops on your chosen instruments?
- Are trailing stops managed server-side or platform-side?
- How often does the trailing level update?
- How do trailing stops behave during volatility or spread widening?
- Are trailing-stop adjustments visible in trade history?
- Do trailing stops remain active if the platform disconnects?
- Are trailing-stop rules clearly documented?
Related Concepts
Trailing stops are a dynamic variation of standard stop losses.
Guaranteed stops remove price risk that trailing stops cannot.
Trailing stops can still suffer slippage when triggered.
High volatility increases the likelihood of trailing stops being triggered.
Execution quality determines how trailing stops are filled in practice.
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