Trailing Stop

A trailing stop is a type of stop order that moves automatically with the market price of a security. Unlike a fixed stop-loss order that stays at one price, a trailing stop follows the stock price as it rises (for a long position) by a specified dollar amount or percentage. For example, if you set a 10% trailing stop on a stock purchased at $100, the initial stop price is $90. If the stock rises to $120, the trailing stop automatically adjusts to $108 (10% below the new high). If the stock then declines from $120, the trailing stop remains at $108 and triggers a market order to sell once the price hits that level. The key advantage is that the trailing stop never moves down — it only follows the price upward, effectively locking in profits as the stock appreciates while providing downside protection. Trailing stops can be set as a fixed dollar amount (e.g., $5 below the highest price) or as a percentage. They are particularly popular among trend followers and position traders who want to ride winning trades while having an automatic exit strategy. However, in volatile markets, a trailing stop set too tightly may trigger a sale during a normal price fluctuation, causing the investor to miss a subsequent recovery.