Glossary
Trailing stop
A stop order whose trigger price follows a rising stock by a set dollar amount or percentage, locking in gains while staying in the trend.
On this page
A trailing stop is a stop order that adjusts itself. Instead of a fixed trigger price, you set a distance, in dollars or percent, and the stop follows the stock's best price at that distance. For a long position it moves up when the stock makes new highs but never moves down. It aims to keep you in a rising trend while automatically limiting how much of the gain you give back.
How it works
The broker tracks the highest price since the order was placed (the "high-water mark") and keeps the trigger at the chosen distance below it. When the stock falls far enough from that peak to touch the trigger, the order becomes a market order, or a limit order for a trailing stop-limit.
Choosing the distance
The trail is the whole decision. Too tight, and normal volatility shakes you out early in a trend that keeps going; too loose, and you give back much of the gain before it triggers. A volatile stock that routinely moves 4% a day needs a wider trail than a utility. Some traders size the distance with the average true range instead of a fixed percentage, so it adapts to each stock.
Like any stop that becomes a market order, a trailing stop can fill below its trigger after a gap. Brokers differ in whether they adjust trails using only regular-hours prices, so read your firm's rules.