What is a trailing stop?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 4 min
In short
A trailing stop is a stop whose trigger level follows the price as it moves in your favour, and never moves back the other way. Once the price retraces to that level, the position closes. How wide you set the trail changes how easily that happens.
Key points
- The trigger follows favourable moves automatically
- It never retreats when the price moves against you
- The trail is set as an amount or a percentage
- A narrow trail closes on a small reversal
Definition
A stop order whose trigger price is automatically ratcheted up (or down) as the market moves in the position's favour, and held fixed otherwise.
Take a long with a 100,000 yen trail. At a price of 5,000,000 the trigger sits at 4,900,000. If the price rises to 5,300,000 the trigger ratchets to 5,200,000 — and stays there if the price falls back, closing the position when that level is touched.
The width of the trail directly determines how readily the order fires. A narrow trail reacts to small reversals; a wide one survives them but only closes after a larger pullback. Neither setting is inherently better, and neither makes an outcome more likely.
Implementations differ between venues: whether the triggered order goes out as a market or limit order, and whether the trail tracks traded prices or quoted prices. The same settings can therefore behave differently, so check the specification first.
Watch out for
- · If the triggered order goes out at market, the fill can be far from the trigger level
- · A narrow trail can close the position on a brief, incidental move
- · Venues track the trail differently, so identical settings can behave differently