Trailing Stop: What It Is, How It Works and How to Use It

Key Takeaways

• A trailing stop is a stop loss that follows price at a set trailing distance as a trade moves in your favour.
• A trailing stop only moves in the trade's favour and stays where it is when price turns back against the trade.
• The trailing distance sets the trade off, because a tight trailing distance gets stopped out by normal swings and a wide one gives back more profit.
• A trailing stop has no guaranteed exit price, because it closes the trade at the next available price and slippage or a gap can fill it worse.
• An MT4 or MT5 trailing stop only trails while the desktop platform is open, because the trailing stop runs on the platform and not on the server.

What Is a Trailing Stop?

A trailing stop, also called a trailing stop loss, is a stop loss mechanism that automatically moves in the direction of a profitable trade by maintaining a predefined distance from the market price. That distance can be set in pips, points or as a percentage, depending on the trading platform and order type.

Unlike a standard stop loss, which remains at a fixed price unless manually adjusted, a trailing stop follows favourable price movements and stays unchanged when the market reverses.

For example, if a trader buys EUR/USD at 1.1000 and uses a 30 pip trailing distance, a trailing stop can move upward as the currency pair rises, helping protect profits if the price subsequently falls. The exact behaviour depends on the platform. On MT4 and MT5, the platform's own trailing stop activates after price moves favourably by the specified distance.

A normal stop loss stays at the price you chose when you opened the trade. A trailing stop starts the same way but keeps stepping closer to price as the trade moves into profit. Once the trailing stop passes your entry price, the stop level itself sits in profit, although slippage and gaps can still make the actual exit worse.

A trailing stop has two jobs. A trailing stop limits the loss if the trade goes wrong from the start, and locks in profit if the trade goes right and then turns back. The order of the steps a trailing stop follows explains why the stop never moves back.

How Does a Trailing Stop Work?

A trailing stop loss starts as a stop loss at your trailing distance from entry, moves with the best price the trade reaches, and stays fixed when price turns back. On a buy trade, the trailing stop works in five steps.

1. You set a trailing distance, either as a percentage of price or as a number of pips or points.
2. The trailing stop starts as a normal stop loss, placed one trailing distance below your entry price.
3. As price rises, the trailing stop follows the highest price reached since entry and keeps the same trailing distance behind that high.
4. When price falls back from the high, the trailing stop stays where it is.
5. If the price falls far enough to reach the trailing stop, the trade closes.

The reference point is the detail beginners miss most. A trailing stop follows the highest price reached since entry, so a pullback that does not make a new high leaves the trailing stop untouched. Only a new high moves the trailing stop up again.

In short, a trailing stop can only move toward profit, and a pullback is the moment the trailing stop is most likely to be hit. A sell trade uses the same five steps in the opposite direction.

Trailing Stop on Long and Short Trades

On a buy (long) trade, the trailing stop sits below price and only moves up. On a sell (short) trade, the trailing stop sits above price and only moves down, following the lowest price reached since entry.

On a hypothetical long trade, a trader buys AUD/USD at 0.6600 with a 30 pip trailing distance, so the trailing stop starts at 0.6570. If price rises to 0.6650, the trailing stop moves up to 0.6620.

On a hypothetical short trade, a trader sells AUD/USD at 0.6600 with the same 30 pip trailing distance, so the trailing stop starts at 0.6630. If price falls to 0.6550, the trailing stop moves down to 0.6580 and stays there if price bounces. Either way, the trailing stop eventually closes the trade, and the exit price is not always the stop level.

What Happens When a Trailing Stop Is Triggered

When price reaches the trailing stop, the trade closes at the next available price, exactly like a normal stop loss. The trailing stop level is the trigger price, and two things can make the actual fill worse.

• Slippage happens in a fast market when the next available price is already past the trailing stop level, so the trade closes a few pips worse than planned.
• A gap happens when price jumps past the trailing stop with no trades in between, for example over a weekend or after major news, and the fill can then be much worse than the trailing stop level.

A trailing stop limits risk, but a trailing stop does not guarantee the exit price or protect against every loss. Some platforms offer a version that controls the exit price, called the trailing stop limit.

Trailing Stop vs Trailing Stop Limit

A trailing stop closes the trade at the next available price, while a trailing stop limit turns into a limit order when hit and never fills worse than its limit price. The catch is that a trailing stop limit may not fill at all if price moves past the limit, which leaves the trade open while the loss grows.

The trailing stop limit is mainly offered by stock brokers. MetaTrader's help for MT4 and MT5 describes only the standard trailing stop, which is the order the rest of this guide covers. A worked example shows the standard trailing stop with real numbers.

Trailing Stop Trading Example and How It Works in Practice

A trailing stop loss example shows the trailing stop following the highest price and staying put on a pullback. In this hypothetical buy trade, a trader buys a share CFD at $200 and sets a 10% trailing stop.

The trailing stop moved up three times, at $220, $250 and $260, because each was a new highest price. During the pullback to $235, the highest price stayed at $250, so the trailing stop stayed at $225. When price turned back from $260 and fell to $234, the trailing stop closed the trade with about $34 profit per share, or 17%, before slippage and costs.

A fixed stop loss at $180 on the same trade would still sit at $180 after the reversal, with none of the open profit locked in. A fixed stop loss left at $180 is the clearest way to see how the two orders differ.

Trailing Stop Loss vs Stop Loss

A stop loss stays at the price you set, while a trailing stop loss moves with price as the trade gains to lock in profit.

Both orders close the trade at the next available price when hit, so neither guarantees the exit price. Neither order is better in every case. A stop loss suits setting the maximum loss at entry, and a trailing stop suits riding a trend once the trade is in profit.

Many traders start a trade with a normal stop loss and switch to a trailing stop once the trade is in profit. The trailing distance for that trailing stop can be measured in several ways, and each type suits a different market.

Types of Trailing Stop Strategies

Types of trailing stop strategies differ in how the trailing distance is measured, from a fixed percentage or number of pips to a distance taken from an indicator or the chart.

Percentage Trailing Stop

A percentage trailing stop stays a set percentage below the highest price on a buy trade. Because the trailing distance is a percentage, the distance in money grows as price rises, so a 10% trailing stop sits $20 below a $200 high but $26 below a $260 high. Traders often use a percentage trailing stop on shares and indices, although 10% means the same distance whether the market is calm or swinging hard.

Fixed Pip or Point Trailing Stop

A fixed pip or point trailing stop stays a set number of pips or points behind price, which is the most common way forex traders set a trailing distance. In this hypothetical buy trade, a trader buys GBP/USD at 1.2700 with a 40 pip trailing stop.

MT4 and MT5 measure the trailing distance in points. TMGM quotes major pairs such as EUR/USD and GBP/USD to 5 digits, so 10 points equal 1 pip and a 40 pip trailing stop is 400 points. A fixed number of pips ignores changes in volatility, so 40 pips can be too tight on a busy day.

ATR Trailing Stop

An ATR trailing stop sets the trailing distance as a multiple of the average true range (ATR), an indicator that measures how much a market usually moves over a set number of periods. Because ATR rises when the market moves more and falls when the market calms down, the trailing distance widens and narrows with volatility. The cost is one more indicator and its settings to choose.

Moving Average Trailing Stop

A moving average trailing stop closes the trade when price closes beyond a chosen moving average, such as a 20 period moving average, below the line on a buy trade and above the line on a sell trade. A moving average smooths out small swings, so the trade survives minor pullbacks, but a moving average reacts late in fast moves and can give back more profit before the exit.

Support and Resistance Trailing Stop

A support and resistance trailing stop is moved by hand to just beyond the latest swing point, below each new higher low on a buy trade and above each new lower high on a sell trade. A higher low is a dip that stops above the previous dip. Following the market's own structure gives the trailing stop a logical place to sit, but the trader must update the stop loss manually and judge which swing points count.

How to Choose Your Trailing Stop Loss Distance

There is no single best trailing stop loss distance. A good trailing distance sits outside the normal swings of the market you trade, so ordinary pullbacks do not reach the trailing stop.

Every trailing distance is a trade off. A trailing distance that is too tight gets you stopped out by normal pullbacks before the trend has run. A trailing distance that is too wide keeps you in the trade but gives back much of the profit before the trailing stop is hit. Three factors help set the trailing distance.

• Volatility shows how far the market usually moves in a day or a session, and a market with bigger swings needs a wider trailing distance.
• Your timeframe changes the size of normal moves, since a trade held for hours sees smaller pullbacks than a trade held for days.
• Normal pullback depth shows how far price usually pulls back during a trend, and the trailing distance should sit beyond that depth.

Suggested trailing stop percentages vary widely between sources, so the table matches common situations to a wider or tighter trailing distance without fixed numbers.

Decide the trailing distance before you enter the trade. A trailing distance chosen mid trade tends to get tightened by feel as profit grows, which raises the chance of an early exit.

A trailing stop also does not stop you getting stopped out early. A trailing stop only ever moves closer to price as profit grows, so a trade that keeps getting stopped out early needs a wider trailing distance from the start. Test a trailing distance on a demo account first to see how often normal swings reach the trailing stop in the market you trade.

Even a well chosen trailing distance works poorly when the market is not trending.

When to Use a Trailing Stop

A trailing stop strategy is generally more suitable for trending markets, where price continues making higher highs or lower lows. As the trend develops, the trailing stop adjusts to favourable price movements, helping traders protect accumulated profits while allowing the trade to continue. Each new high moves the trailing stop up and locks in more profit.

In a sideways market, price swings back and forth inside a range, so the trailing stop gets hit after small moves and the trade often closes for a small profit or a small loss.

A trailing stop also helps when you can't watch the screen, because the trailing stop updates without manual work. On MT4 and MT5, the trailing stop only updates while the desktop platform is open. Matching the trailing stop to the market type brings out both its advantages and its disadvantages.

Advantages and Disadvantages of a Trailing Stop

A trailing stop loss locks in profit and lets winning trades run, but normal swings can close the trade early and the exit price is never guaranteed.

The biggest advantage of a trailing stop is the profit the trailing stop protects. In the $200 share CFD example, the trailing stop locked in about $34 per share that a fixed stop loss at $180 would not have protected. The biggest disadvantage is the early exit, since a tight trailing distance can close a good trade on a normal pullback just before the trend carries on.

Setting a trailing distance well needs some basic technical analysis, such as reading how far a market usually swings. Even with a trailing stop in place, check open trades regularly, because news, gaps and platform issues can still change the result. If a trailing stop suits the trade, MT4 and MT5 let you set one from the open position in a few clicks.

How to Set a Trailing Stop in MT4 and MT5

To set a trailing stop in MT4, right click the open position in the Trade tab, choose Trailing Stop and pick a distance in points.

1. Open a trade and set a normal stop loss.
2. Open the Terminal window and go to the Trade tab.
3. Right click the open position.
4. Choose Trailing Stop from the menu.
5. Pick a preset trailing distance in points, or choose Custom and enter your own.

MT5 uses the same steps, with the Toolbox window in place of the Terminal window. Only one trailing stop can be set per position, and choosing None removes it.

An MT4 or MT5 trailing stop runs on your desktop platform and not on the broker's server, according to MetaTrader 4 Help and MetaTrader 5 Help. The trailing stop only keeps trailing while the platform is open and connected. If you close the platform, the last stop loss level the trailing stop set stays on the server but stops moving.

An MT4 or MT5 trailing stop also starts only once the trade's profit reaches the trailing distance, and then places a stop loss that far from price. Until then, the normal stop loss from step 1 protects the trade.

Broker help pages say the MT4 mobile app can't place a trailing stop, so set the trailing stop on the desktop. A virtual private server (VPS) keeps MT4 or MT5 running while your own computer is off. Menu names can differ slightly between platform versions.

Trailing Stop FAQs

What Does a 10% Trailing Stop Mean?

A 10% trailing stop sits 10% below the highest price reached since entry on a buy trade. If a share CFD rises from $100 to $150, a 10% trailing stop moves from $90 to $135. Whether 10% suits a trade depends on how much the market normally swings, since a calm market may need less and a volatile market more.

Can a Trailing Stop Move Back Down?

No, a trailing stop never moves back down on a buy trade. On a buy trade the trailing stop only moves up, and on a sell trade the trailing stop only moves down. When price turns against the trade, the trailing stop stays where it is until price makes a new high or low or reaches the trailing stop.

Can You Use a Trailing Stop With a Take Profit?

Yes, most platforms let you set a trailing stop and take profit on the same trade, and the trade closes at whichever is hit first. A take profit closes the trade at a fixed price in profit, so a take profit caps the gain that the trailing stop would otherwise let run. A trailing take profit is a different order that follows price to close a winning trade, and not every platform offers one.

Which Indicator Is Best for a Trailing Stop Loss?

No single indicator is best for a trailing stop loss. ATR and moving averages are the most common choices. ATR sets the trailing distance from volatility, and a moving average gives an exit when price closes beyond the line.

Should Beginners Use a Trailing Stop Loss?

Yes, beginners can use a trailing stop loss once they understand how a normal stop loss works. Practise on a demo account first to see how the trailing distance behaves in real market conditions. On MT4 and MT5, remember that the trailing stop only trails while the desktop platform is open.