Trailing stops: how they move and where they fail

A trailing stop is a stop-loss order that follows price. When the trade moves in your favour, the stop moves with it by a set distance. When price moves against you, the stop stays where it is and never moves back. It can lock in part of a gain without a fixed exit, but it has limits that are easy to overlook.

How the distance is set

Traders usually set the trailing distance in one of two ways:

• Fixed pips: for example, 30 pips behind the highest price since entry. It is simple, but the same distance means very different things in quiet and volatile markets.
• A volatility multiple: a number of average true range values. This adjusts the distance to recent movement, so the stop has room in a volatile market.

Where trailing stops fail

• Noise. A tight trail is hit by ordinary swings and closes a trade that might have continued. A wide trail gives back more of the gain before it triggers.
• Gaps and slippage. Once triggered, a stop becomes a market order. Its fill can differ from the stop price, especially in fast markets or after a gap. The bid, ask and slippage guide explains why.
• Wider spreads. Spreads can widen around rollover and major releases, so a stop can fill further from the price you expected.
• Platform differences. How the trail is calculated, and whether it works on a partly closed position, depends on the broker and the platform. Test it on a demo account before you rely on it.

Using one sensibly

Write the rule before the trade: the starting stop, the distance and the reason for both. Do not change the distance in the middle of a move because a trade looks uncomfortable. Review how often the trail was hit and what price did afterwards. For the first stop, before any trail, see where to place a stop-loss.