# 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.

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Source: https://pretraide.com/glossary/trailing-stop