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Glossary
Trailing stop
Definition
A trailing stop is a type of stop-loss order used to manage risk. A stop-loss order will close a position if the price moves to a certain level in an adverse direction, thus cutting the trader's or investor's losses. With trailing stops, if the value of the position improves—if the price rises, for example—the level of the stop will also move in line with it. For instance, a trailing stop set USD 1 below the asset's current price of USD 10 will increase from USD 9 to USD 14 if the asset's price rises to USD 15. A regular 'non-trailing' stop-loss order would remain at USD 9. In this way, a trailing stop can lock in profit while protecting against losses. These orders can be set as a cash amount or a percentage away from the current market rate.
What is a trailing stop?
A trailing stop order can limit your losses in a position, just like a normal stop order. However, unlike a normal stop order, the trailing stop level will follow the position if it becomes increasingly profitable. You would therefore place the trailing stop below the market price for long positions, and above the market price for short positions.
Why is it important to consider a trailing stop when trading?
A trailing stop enables you to protect a position, without the risk of taking profits too early. If the position moves smoothly in one direction, your stop will follow it until there is a pull-back big enough for the position to reach the stop price.
The trailing stop order only moves in one direction:
- A trailing stop to sell is placed on a long position and only moves up.
- A trailing stop to buy is placed on a short position and only moves down.
When placing a trailing stop, you need two parameters:
- Stop-loss order level to determine a distance to the market (can be placed in different units: percent, price, ticks, or currency).
- Trailing step to specify how much the market should move before the stop order re-adjusts.
Learn how to use a trailing stop with Saxo.