Risk & volatility

Trailing stop

Trailing stop is a stop order whose trigger follows a favorable price move by a fixed amount or percentage but does not move back when the price reverses.

What it means

A trailing stop adjusts its trigger as a stock moves in a favorable direction. For a sell trailing stop on shares you own, the trigger rises when the reference price reaches a new high and stays where it is when the price falls. A buy trailing stop, which can be used to close a short position, works in reverse: its trigger falls with new lows but does not rise on a rebound.

The trail can be a fixed dollar amount per share or a percentage. The broker’s rules determine which price updates the trigger, such as a last trade or a quoted price, and when the order is active. When the trigger is reached, a trailing stop typically becomes a market order. That means the trigger is not a guaranteed fill price.

How it is calculated

For a percentage-based sell trailing stop, the running trigger is:

Trigger = H × (1 − p)

  • H is the highest eligible reference price observed since the trailing stop began, in US$ per share.
  • p is the trailing percentage expressed as a decimal; for example, 5% is 0.05.
  • Trigger is the resulting stop price, in US$ per share, subject to the broker’s price-increment and rounding rules.

For a dollar-based sell trail, use Trigger = H − d, where d is the trail in US$ per share. For a buy trailing stop, replace the high with the lowest eligible reference price, L: Trigger = L × (1 + p) or Trigger = L + d. The reference high or low changes only in the favorable direction, so the trigger does not move backward. A broker may apply different rules for initialization, rounding and extended-hours prices.

Worked example

Suppose, hypothetically, an investor owns 100 shares and enters a 5% sell trailing stop while the eligible reference price is US$100 per share. Assume the broker uses the prices below without additional rounding.

  1. At US$100, the trigger is US$100 × (1 − 0.05) = US$95.
  2. The reference price rises to US$110. The high becomes US$110, moving the trigger to US$110 × 0.95 = US$104.50.
  3. The price slips to US$108. The high remains US$110, so the trigger remains US$104.50.
  4. If an eligible price reaches US$104.50, the stop triggers. If the resulting market order fills at a hypothetical US$103 per share, gross proceeds are 100 × US$103 = US$10,300, before trading costs—not US$10,450.

A sharp gap could produce a lower fill, and trading could be halted before execution. A triggered order may also fill in parts.

Why it matters before you trade

A trailing stop defines a moving trigger, not a maximum loss. The trail’s size affects how easily ordinary price fluctuations may reach it: a smaller trail leaves less room for movement, while a larger trail allows a wider reversal. Neither setting guarantees a particular outcome.

Before placing an order, distinguish the trigger from the expected execution price. Check the broker’s reference-price rules, trading-hours settings and order duration. Also consider the stock’s volatility, bid-ask spread, liquidity and potential for overnight gaps. A stop-limit variant sets a minimum acceptable sell price or maximum acceptable buy price after triggering, but may not fill at all.

How PreTrAIde uses it

The product facts do not state that PreTrAIde calculates trailing-stop levels, monitors them or places trailing-stop orders. Its pre-trade analysis instead evaluates a user-built stock basket before an order is placed. The user supplies each line’s side, quantity and execution conditions; PreTrAIde returns a GO, NO-GO or MODIFY verdict with a risk assessment, suggested execution strategy and plain-language reasoning. Its quantitative layer estimates factors such as spread, market impact, daily volatility and liquidity. These can inform a separate check of execution risk, but they do not make a trailing-stop trigger or fill certain. Users place their own orders with their broker.

Common mistakes

  • Treating the trigger as a guaranteed price: A market order can fill beyond it, particularly during a gap or in a thin market.
  • Assuming the stop only rises: That describes a sell trail. A buy trail follows favorable moves downward.
  • Expecting an unchanged percentage loss from the entry price: The trigger follows a running reference high or low, not necessarily the purchase price.
  • Ignoring broker-specific rules: Reference prices, rounding, trading hours and order duration can change when or whether the stop triggers.

Frequently asked questions

Does a trailing stop guarantee a selling price?

No. A sell trailing stop typically becomes a market order when triggered, and the fill can be below the trigger, especially after a price gap or in an illiquid stock.

What is the difference between a trailing stop and a stop-loss?

A conventional stop-loss has a fixed trigger unless you change it. A trailing stop automatically moves its trigger after favorable price moves, according to its specified dollar or percentage trail.

Can a trailing stop move down?

A sell trailing stop does not lower its trigger when the stock falls. A buy trailing stop can lower its trigger as its reference price reaches new lows, but it does not raise the trigger on a rebound.

Related terms

Stop order Stop order is an instruction that becomes a market order when a specified stop price is reached, so its execution price can differ from the stop price. Stop-loss Stop-loss is a planned exit from a position if its price reaches a specified threshold, intended to limit losses but unable to guarantee a maximum loss or an execution price. Stop-limit order Stop-limit order is an instruction that, once a specified stop price is reached, becomes a limit order that can execute only at its limit price or better. Gap risk Gap risk is the possibility that a stock’s next available trading price jumps above or below its previous price, causing a fill or loss beyond the level expected. Slippage Slippage is the difference between a trade’s expected price and its actual fill price, expressed per share, as a percentage or in total dollars. Volatility Volatility is a measure of how widely an asset’s returns vary over a specified period, usually expressed as the standard deviation of returns.

Risk & volatility

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Educational content, not investment advice. PreTrAIde is analysis software, not a broker: it never executes orders, and its verdicts are decision support, not recommendations to buy or sell.