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Trailing Stop Order - What is it and How to Use it?

Updated Jan 05 2021

Trailing Stop Order - What is it and How to Use it?

Table of Contents:

Trailing Stop Order Explained

A trailing stop order is a dynamic stop order that maintains a pre-set maximum distance from the current price as long as it moves in the trader’s favour. If the price goes against the trader, the trailing stop will hold its position until it get hits and then a market order will be executed.

Another way to summarize what a trailing stop order is could be: a stop order that chases the current price by a fixed distance as long as it moves in your favour. 

Notice we used the word distance and that is because trailing stops can be set usually with a fixed amount of distance points.

Trailing Stop Distance

Some brokers might give you the option to set it in percentage or any modification they can think of, but it the end it will become distance points (remember, brokers love to oversimplify things and create friendly names).

An example of using distance is: 0.30 from the current price.

If you set a trailing stop-loss with a distance of 0.30 and the current price is $50 then your trailing stop’s trigger price will be initially $49.7 and then every time the current price of the asset climbs $0.1 then the trailing stop will also climb maintaining that 0.30 distance.

Continuing our example, if the price climbs to $50.3 then our trailing stop-loss order will climb to $50. Now, if the price falls to $50.25 then what happens to the trailing stop-loss?

ABSOLUTELY NOTHING, STAYS AT ITS LAST POINT.

And that’s what you need to get, the trailing stop moves forward only in your favour and if the asset stops moving in your favour then the trailing stop-loss stays stuck until it gets hit.

Trailing Stop-Loss Animation

The animation above is a pretty cool visual example of a trailing stop-loss order, look at it for several seconds, notice how when the price moves up it moves up also, but when the asset’s price begins to fall it stays exactly at it’s latest point and boom, trade closed.

How to Place a Trailing Stop Order

Most beginner trading platforms don’t have the option for trailing stops, others do have it but it’s not a custom trailing stop order, they just offer “trailing stop-loss” and then there’s professional trading platforms that allow you to set trailing stop orders, chose the type of order (buy or sell) or any other parameters.

To place a trailing stop all you need is:

Enter Distance

The trick lies in knowing the distance measure you’re using. If your trading platform mentions percentage then they could be referring to a percentage of the trade’s value, for example:

Advantages and Disadvantages of the Trailing Stop Order

The main advantage is:

The main disadvantage is:

When should you use a Trailing Stop Order?

Trailing stops are meant to be used when you have a trade in profit and you want to give it the opportunity to keep moving in your favour while ensuring that if it goes against you, you cash in some profit.

Trailing Stop Loss Example

Use the example above to imagine that you bought a stock at $5 and you didn’t set any stop-loss or take profit orders.

Some time passes and the stock is trading at $15, then at that precise moment you decide to set a trailing stop-loss order at $10, meaning that your fixed distance is:

That means that there are 2 possible outcomes here:

Remember, trailing stops ONLY MOVE in your FAVOUR, in any other case they get stuck on their last price.

Common Trailing Stop Order Mistakes

Trailing Stop-Loss Mistakes

The most common mistakes when using a trailing stop order are:

Hope you liked our guide,

Enjoy!

Trailing Stop Order - What is it and How to Use it?

Author

Stefano Treviso

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