# Trailing Stops: What They Are, How To Use Them in Trading

> **Definition**
>
> A trailing stop is a stop-loss order that moves with the market price, protecting profits on a trade from a market reversal.

Flying a plane is easy. Landing it is the challenge. Similarly, profitable trading is all about the exit. It can be hard to watch a market reverse course and wipe out all—or even a significant chunk—of the profits from a formerly winning trade. But in a trending market, how do you know when to exit?

That's when you need a trailing stop. The trick is finding a technique that strikes the right balance between letting a profitable position run and protecting profits from a reversal without getting stopped out by the market's normal ebb and flow. This is especially important in trend-following strategies, when the idea is to follow the market as long as it's trending.  

### Key Takeaways

*   Trailing stops are meant to protect profits in a winning trade by tracking the market, preventing big gains from turning into small ones and small gains from turning into losses.
*   Finding the right balance is crucial. A stop that's too tight may result in a trader getting stopped out by the regular ups and downs of the market, while one that's too loose could mean giving back most of a big win.
*   Trailing stops are best suited for trending markets, when the idea is to stick with the trade as long as it's moving in your favor.  
    

![Trailing Stop: A modification of a typical stop order that can be set at a defined percentage or dollar amount away from a security's current market price.](https://www.investopedia.com/thmb/4XhX1b69tf84j_oIdxho4e6adLw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TrailingStop-21d9b90828874e13ada7282217d8244d.jpg)

*— Investopedia / Xiaojie Liu*

## Understanding Trailing Stops

A [stop order](https://www.investopedia.com/terms/s/soft-stop.asp) exits a long or short position when the price hits a certain level. A trailing stop is simply a stop order that automatically follows—or trails—the market once the price of a security has initially begun moving in a favorable direction. If the market later reverses direction, the stop price will remain fixed, and the exit order will be placed if the stop price is hit.

The goal is to protect existing profits on the trade. Otherwise, if you leave only your initial stop in place or have no stop in place, a once-winning trade could turn into a loser. That's a losing strategy overall.

The concept is simple enough. But deciding where to place the trailing stop is challenging. If you set the trailing stop too close to the current price, normal price swings that don't constitute a true reversal could stop you out, leaving money on the table. If the stop is too far away, a true reversal could end up chewing up more of your potential profit than necessary—or even all of it.

The answer depends on several factors, including the time frame you're trading, the volatility of the market you're trading, and personal choice.  

> **Important**
>
> Trailing stops help eliminate emotion when exiting trades, perhaps the most important part of trading.

## Types of Trailing Stops

There are several types of trailing stops, each with different ways of determining where to place stops as the market continues to move. Here are some of the most common:

*   A defined percentage above or below (if short or long, respectively) the current market price, sometimes aligned with [Fibonacci retracement levels](https://www.investopedia.com/terms/f/fibonacciretracement.asp) in long-term trades.
*   A specific dollar amount above or below the current market price.
*   The average true range over _n_ number of days multiplied by _y_ number of days. For example, you can set a stop equal to five days away from the most recent close, with each day represented by the average true range over the past 14 days. In a trend-following strategy, this is a useful way of letting the market run without getting stopped out by normal price swings that don't amount to a change in the trend.
*   A close above or below a specific moving average, such as the eight-, 20-, or 50-day trailing stops.
*   Previous [support or resistance levels](https://www.investopedia.com/trading/support-and-resistance-basics/). For example, if the market recently found support or resistance during a healthy pullback to a certain price level, a break below or above that level would be a strong exit signal—so a stop could be placed there.  
    

## Trailing Stop Example

Let's say NVIDIA Corporation ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=nvda)) breaks to a new high at $100 and you buy. You decide you're willing to risk a 5% loss on the initial entry, so you put the first stop at $95.

The stock then moves to $110. Your position is showing a profit and you decide 10% is an appropriate trailing stop given the stock's [volatility](https://www.investopedia.com/ask/answers/010915/volatility-good-thing-or-bad-thing-investors-point-view-and-why.asp). So you set the trailing stop at 10%, which at this point would be $99 (110 - (11 × 0.10)).

As the price continues to rise, the trailing stop automatically rises with it. When the price reaches $120, the trailing stop is at $108, ensuring at the very least that you'll secure a profit of 8%.

The stock eventually closes as high as $135. At that point, your stop would be at $121.50 (135- (135 × 0.10)). Three days later it crosses below that level before closing at $118. Your stop is triggered at $121.50, so you secure a profit of 21.5%, assuming perfect execution.

It will be months before NVDA trades above $135 again, and, in the meantime, it will fall as low as about $90. If you had set a looser stop—say 20%—you would have been stopped out at $108, meaning what had been a 35% profit ended up at 8% (instead of 21.5% with a 10% stop).

In this way, you've not only secured a solid profit with a 10% trailing stop, you've freed yourself up to pursue other prospects NVDA [trades sideways](https://www.investopedia.com/terms/s/sidewaystrend.asp) for an extended period.

## Pros and Cons of Trailing Stops

Pros

*   Locks in Profits
    
*   Reduces Emotion in Trading
    
*   Automates Risk Management
    
*   Useful Exit Strategy for Trending Markets
    

Cons

*   Learning Curve
    
*   Not Suited for all Market Stages or Time Frames
    
*   Risks Premature Exits
    

## The Pros

*   **Locks in profits**: An effective trailing stop can help protect existing profits on a trade while still giving the market room to run. This helps traders stick to the adage to "let your profits run."
*   **Reduces [emotional trading](https://www.investopedia.com/articles/basics/10/how-to-avoid-emotional-investing.asp)**: In addition to protecting your profits, a major benefit of using a trailing stop is that it forces traders to think clearly about their exits before entering a trade and set rules based on the resulting decisions.
*   **Automates risk management**: Most trading platforms will let you automate basic trailing stops, so you don't have to manually adjust your stop as the market moves.
*   **Especially useful in trending markets**: Trailing stops are most effective when used with a trend-following strategy, although they're also handy for protecting yourself in cases of false breakouts from a rangebound market.

## The Cons

*   **Requires some understanding of technical trading**: Making sound decisions in setting a trailing stop requires hard thinking about the market, as well as a basic understanding of [technical analysis](https://www.investopedia.com/articles/active-trading/102914/technical-analysis-strategies-beginners.asp). Like trading strategies in general, anyone can borrow a strategy for trailing stops. But if you don't understand its logic, it may not be appropriate for the market you're trading.
*   **Not suited for all market stages or time frames**: Different types of exits are better suited for most [day trading strategies](https://www.investopedia.com/terms/d/daytrader.asp) unless the trading strategy is limited to trend days. Similarly, swing trading by definition is _not_ about riding a trend, so exits are likely best chosen based on price levels or other criteria—trailing stops aren't well-suited for sideways markets.
*   **Risk of premature exits**: If the trailing stop is set too close to the current price, even a moderate surge in volatility can stop a trader out of a still-trending market.  
    

## The Bottom Line

Trailing stops offer a powerful way to lock in profits while letting winning trades run. By tracking the market while it moves in a favorable direction, a well-placed trailing stop ensures traders don't give back significant gains to reversals. Trailing stops also help automate [exits](https://www.investopedia.com/articles/active-trading/020915/mustknow-simple-effective-exit-trading-strategies.asp) and avoid emotional decision-making.

But trailing stops aren't always the best choice for exiting a trade. They work best in trending markets and are generally not well-suited for day trading. They are also best deployed by people with at least a basic understanding of technical analysis.  

> **Article Sources**
>
> 1.  P. J. Kaufman. "[Trading Systems and Methods](https://www.wiley.com/en-us/Trading+Systems+and+Methods%2C+6th+Edition-p-9781119605355)," Pages 1022-1027. John Wiley & Sons, 2019, sixth edition.
>     
> 2.  U.S. Securities and Exchange Commission. "[Investor Bulletin: Understanding Order Types](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-14)."
>     
> 3.  Cole Wilcox and Eric Crittenden, Blackstar Funds LLC. "[Does Trend Following Work on Stocks](https://www.cis.upenn.edu/~mkearns/finread/trend.pdf)?"