What Is Trailing Stop Loss?
A trailing stop loss adjusts upward (for longs) as the trade moves in your favor but never moves down. If you enter at $100 with a $5 trailing stop, your initial stop is at $95. If price moves to $110, the stop moves to $105. If price then drops to $103, the stop stays at $105 — you'd exit there.
The benefit is letting winners run while locking in profit. The challenge is calibration: too tight and normal pullbacks stop you out of major winners; too loose and you give back too much when a trend reverses. ATR-based trailing stops adapt to the asset's typical volatility automatically.
Trailing stops work best in trending markets and worst in choppy ones. In strong trends, they capture the bulk of a move with disciplined exits. In sideways markets, they generate frequent stop-outs followed by re-entries that often happen at worse prices. Use trailing stops with a regime filter that identifies when trends are present.
Related terms
- Stop Loss — A predefined exit price that limits losses if a trade moves against you.
- Trailing Stop — Dynamic stop that moves with favorable price action, locking in profits.
- ATR Multiple — Position sizing or stop-loss expressed as a multiple of Average True Range.
- Risk Management — The systematic process of identifying and controlling exposure to losses.