What Is Trailing Stop?
A trailing stop follows price as it moves in your favor, but doesn't move backward against you. Set as a fixed amount ($2 below the high) or a percentage (5% below the high), the stop ratchets up with new highs and stays put on pullbacks.
The use case is letting winners run while protecting profit. Without a trailing stop, traders often exit too early or give back all their gains to a reversal. The challenge is calibration: too tight and normal noise stops you out of good trends; too loose and you give back too much.
ATR-based trailing stops adapt to volatility — wider in volatile conditions, tighter in quiet ones. Many trend-following systems use 2-3 ATR trailing stops. Manual versions update at end-of-day; broker-managed trailing stops adjust intraday.
Related terms
- Stop Loss — A predefined exit price that limits losses if a trade moves against you.
- ATR Multiple — Position sizing or stop-loss expressed as a multiple of Average True Range.
- Stop-Limit Order — Combined stop trigger plus a limit price — protects against slippage but may not fill.
- Risk Management — The systematic process of identifying and controlling exposure to losses.