By Marco BösingWhat Is a Trailing Stop?
A trailing stop is a dynamic stop loss that automatically moves in the direction of the trade when the price rises (for long positions) or falls (for short positions). However, it stays in place when the price moves against the position — and closes the trade when the stop level is reached.
The principle: the trailing stop follows the price at a set distance. On a long trade, it ratchets higher as new highs are made but never moves back down. This progressively locks in profits while allowing the trade to benefit from further price movement.
Types of Trailing Stops
Fixed Distance
The stop follows the price at a constant distance, measured in points, pips, or percent. Example: a trailing stop with a 20-point distance — with each new high, the stop is moved to the high minus 20 points.
Advantage: Simple and automatable. Disadvantage: Does not account for market volatility.
ATR-Based Trailing Stop
The distance is tied to the current Average True Range (ATR) — typically 1.5 to 3x ATR. In volatile phases, the distance is wider; in calm phases, tighter.
Advantage: Adapts to market volatility. Disadvantage: Requires regular recalculation.
Structure-Based Trailing Stop
The stop is manually trailed according to market structure — below each new higher low (for longs) or above each new lower high (for shorts). This method requires active monitoring but produces the most technically sound stop levels.
Advantage: Technically grounded, less susceptible to being shaken out by volatility. Disadvantage: Not automatable, requires market experience.
Chandelier Exit
A specific trailing-stop approach that ties the stop to the highest high of the last N candles minus an ATR multiple. Developed by Chuck LeBeau, it is available as an indicator on many trading platforms.
When Is a Trailing Stop Useful?
Trend Following
The trailing stop is a common tool for trend-following strategies. It allows the trader to stay in a trend without having to define a fixed price target.
Breakout Trades
After a breakout, a trailing stop ensures that gains are protected if the breakout fails and the price reverses. The stop secures the profit without capping the upside.
News Events
If a trade is in profit before a news event, a tight trailing stop can protect the gain in case the news goes against the position.
Common Trailing-Stop Mistakes
- Too tight: The stop triggers on normal market volatility, and the trader is stopped out before the move continues
- Trailed too infrequently: The stop remains at the entry level even though the price is already well in profit
- Mechanical rather than structural: A fixed distance does not suit every market environment — structure-based stops are more flexible and robust
- Trailing past reversal signals: Tightening the stop in the direction of a trend even though market structure already indicates a reversal
Frequently Asked Questions
Is a Trailing Stop Better Than a Fixed Take Profit?
It depends on the strategy. In trending markets, a trailing stop can capture significantly more profit than a fixed take profit. In range-bound markets, a fixed target is often better since price oscillates between support and resistance. Many traders combine both: partial profits at a fixed target and a remaining position with a trailing stop.
When Should I Activate the Trailing Stop?
A common rule: activate the trailing stop when the trade is at least 1R (the initial risk) in profit. This ensures the trade exits at breakeven or better. Activating earlier increases the risk of being stopped out by normal volatility.
Can I Automate the Trailing Stop?
Yes, most trading platforms offer automatic trailing stops. For simple fixed-distance trailing stops, the built-in function is sufficient. More complex variants — such as ATR-based or structure-based trailing stops — often require custom indicators or programming.