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What is a Trailing Stop?

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Used in a sentence

The Daily Ledger · Markets

She let the position run with a trailing stop 8% behind the price, so the April pullback closed it out at a gain instead of a loss.

The reader highlighted one word mid-article. Clicked made the trading term β€œtrailing stop” easy to understand:

Explained in three depths

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Overview

A trailing stop is an order that sells your shares automatically if the price falls by a set amount from its highest point since you placed the order. It starts from a plain stop-loss, which is an instruction left with your broker to sell if the price drops to a number you choose. A trailing stop moves that number up as the price rises and never moves it down. Say you buy a stock at $50 and set a trailing stop $5 behind. The sell point starts at $45, which is $50 less $5. The stock rises to $60, so the sell point is now $55, again $5 behind. It then falls to $55, the shares sell, and you keep about $5 a share, since you paid $50. The sell point moved up with the price and never came back down.
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Overview

A trailing stop is a sell order that chases the price upward and refuses to come back down. Start with the basic version: you tell your broker "if this stock ever drops to $72, sell it", and that's a stop-loss. The trailing kind raises the $72 every time the stock sets a new high. You pick the gap, in dollars or as a share of the price. Buy at $80 with a 10% gap and the sell point begins at $72, which is 10% under $80. The stock hits $100, so the sell point is $90, still 10% under. It slides to $90, you're sold, and you keep $10 a share on the $80 you paid. A floor that rises with each fresh high and holds still when the price drops. 😎

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Detail

A trailing stop is an order that sells your shares automatically if the price falls by a set distance from its highest point since you placed the order. The distance is a dollar amount or a percentage. The idea comes from an ordinary stop-loss, which is an instruction parked with your broker to sell if the price drops to a level you name, and that level stays where you put it. A trailing stop moves the level up as the price rises and never moves it down. The SEC, the US markets regulator, uses this example in its investor bulletin. You buy a stock at $20 and it rises to $22. You place a trailing stop $1 below the market, so the sell point is $21, which is $22 less $1. The stock rises to $24, and the sell point rises to $23. The stock then falls back, the sell point stays at $23, and the shares sell when the price hits $23. What you lock in is the highest price less the distance: $24 less $1. The order does this on every new high without you watching. It is not a target to sell at, because it never sells while the price is rising. Two limits apply. The sale is made at whatever price the market offers, so in a fast fall the shares can sell for less than $23, which is slippage. And a sell point set close to the price gets hit by ordinary day-to-day wobble, selling you out of a trade that then recovers. Brokers also differ on what counts as hitting the sell point: some use the last trade, others the quoted price. How far behind to trail is a judgement. A $1 trail on a $24 stock is about 4%, so a stock that often moves 3% in a day will hit it on noise, while a wide trail gives up more of the rise before it sells. The distance is the trade-off, and you set it.
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Detail

A trailing stop is a sell order that chases the price upward by a gap you pick and holds still when the price turns down. The plain version first: a stop-loss is you telling your broker "sell if it ever drops to this number", and the number sits where you left it. Trailing means the number climbs behind the price. Buy a stock at $30 with a $2 gap and the sell point begins at $28, which is $30 minus $2. The stock rises to $36, so the sell point is $34, still $2 behind. One dull afternoon it dips to $34, you're sold, and the stock runs to $45 with you watching from outside. That's a gap set too tight for a stock that wobbles. Set it loose and you dodge the wobble but hand over more of what you made before it triggers. There's no correct gap, only the trade-off, and it's yours to make. What you keep is the top price minus the gap, so $34 here. Two things come with any sell order of this kind. The sale goes through at the going price, so a fast drop can fill at $33.60 rather than $34, and that 40 cents is slippage. And brokers don't all agree on what hitting $34 means: some watch the latest trade, some the quote on screen. The one thing a trailing stop never does is sell on a rise. If the stock reaches $300, you're still in. The gap is what not watching the screen costs you. 😎

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Analogy

A trailing stop is an order that sells your shares automatically if the price falls by a set distance from its highest point, with the sell point rising as the price rises and never falling. A climbing wall with a top rope works the same way. As you climb, the person holding the rope takes in the slack, so the rope is always just a little loose. Slip, and you drop only that slack, from wherever you got to. Your height on the wall is the price. Taking in rope on every move up is the sell point rising on every new high. The slack is the distance, and the slack is always what you lose: there is no slip so small that it costs nothing. The rope is never paid out while you climb, and the sell point never moves down. Where the picture breaks: the rope catches you at exactly the slack, while a sale on the market goes through at whatever price buyers are paying. And a climber who is caught can carry on, while an order that has sold you out ends the trade.
Deepest level reached.
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Analogy

A trailing stop is a sell order that moves up behind the price and holds still when the price drops, so you're sold the moment the price falls by the gap you set. A casino walk-away rule is the same thing. You sit down with $200 and decide: whatever my best pile gets to, I leave the moment I'm $50 below it. Your pile is the price, your best pile is the top, and the $50 is the gap. Hit $500, and you're leaving at $450, which is $500 less $50. Reach $800, and the leaving point is $750. The rule never loosens, and that's the point of writing it down before you're $300 up and feeling lucky. It only promises a win once your pile has passed $250, since $250 less $50 is the $200 you came in with. Until then it's a plain quit-when-you're-down rule. Where it falls short: you leave with $450 in your hand to the dollar, while a stop sends out a sale that fills at whatever the market is paying. 😎
Deepest level reached.

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AI explanations may contain errors · Not professional advice

Formal definition β€” The same term, explained the usual way

A trailing stop order is a conditional sell (or buy) order in which the stop price is not fixed but is set at a specified distance, expressed as a dollar amount or a percentage, from the security's market price. As the market price moves in the favorable direction, the stop price is adjusted to maintain that distance; if the price moves in the unfavorable direction, the stop price remains unchanged, and the order is triggered when the market price reaches it. Once triggered, a standard trailing stop becomes a market order, so the execution price may differ from the stop price; a trailing stop-limit variant becomes a limit order instead, bounding the fill price at the risk of non-execution. Trigger standards vary by venue and broker, some using last-sale prices and others quotation prices, and short-term price fluctuations can trigger the order.

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