A trailing stop is a dynamic stop loss order that automatically moves in the direction of your trade as price moves favorably. Unlike a fixed stop loss that stays at one price, a trailing stop “trails” behind the price by a set amount or percentage, locking in profits while still giving the trade room to run.
- Trailing stops only move in your favor—never backward
- They lock in profits automatically without capping your upside
- Set the trail wide enough to avoid getting stopped by normal volatility
How Trailing Stops Work
When you enter a trade, you set a trailing stop at a specific distance from the current price. As price moves in your favor, the stop moves with it. If price reverses, the stop stays put and eventually executes if the reversal continues.
Long Trade:
- Entry: $100
- Trailing Stop: $5 trail
- Initial Stop: $95
As price rises to $120:
- Stop moves to $115 (always $5 behind the high)
If price drops from $120 to $115:
- Stop triggers at $115
- Profit locked: $15 per share
Quick Reference: Trailing Stop Types
| Type | How It Works | Best For |
|---|---|---|
| Fixed Dollar | Trail by specific dollar amount ($2) | All price ranges |
| Percentage | Trail by % of price (5%) | Adjusts with price level |
| ATR-Based | Trail by 2-3× Average True Range | Volatility-adjusted |
| Moving Average | Stop at 20-day or 50-day MA | Trend following |
| Swing Low/High | Stop below recent swing points | Price action traders |
Example: ATR Trailing Stop
Using Average True Range creates a volatility-adjusted trailing stop:
Setup:
- Stock: AAPL at $180 entry
- 14-day ATR: $3.50
- Trailing multiplier: 2× ATR = $7.00
As Trade Progresses:
| Price High | ATR | Trail Distance | Stop Level | Locked Profit |
|---|---|---|---|---|
| $180 | $3.50 | $7.00 | $173.00 | -$7.00 |
| $190 | $3.25 | $6.50 | $183.50 | +$3.50 |
| $205 | $4.00 | $8.00 | $197.00 | +$17.00 |
A trailing stop automatically moves your stop loss to lock in profits as price moves in your favor. Set the trail distance based on the stock’s volatility using ATR or percentage-based methods. Trailing stops let winners run while protecting gains.
Trailing Stop Strategies
1. Chandelier Exit (ATR-Based)
Stop at the highest high minus 3× ATR. Automatically adjusts for volatility—wider stops in volatile markets, tighter in calm ones.
2. Parabolic SAR
Technical indicator that plots trailing stop levels as dots on the chart. Popular for its simplicity and visual clarity.
3. Moving Average Trail
Exit when price closes below a moving average (20 EMA for aggressive, 50 SMA for conservative). Simple and effective for trend following.
4. Break-Even + Trail
Move stop to break-even after initial profit target is hit, then apply trailing stop for remaining position.
Why Trailing Stops Matter
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Let winners run – Capture large trend moves without needing to predict exact exit points
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Automatic profit protection – No need to watch screens constantly; profits are locked in automatically
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Emotional discipline – Removes the temptation to exit too early or hold too long
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Adapts to volatility – ATR-based trails automatically adjust to market conditions
Common Mistakes
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Trailing too tight – Setting trails within normal volatility range guarantees getting stopped out before real trend ends.
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Not accounting for gaps – Trailing stops don’t protect against overnight gaps. You may exit far worse than your stop level.
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Using same trail for all stocks – A $5 trail works differently on a $20 stock vs. a $200 stock. Use percentage or ATR methods instead.
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Trailing from the start – Consider letting the trade develop before activating the trail. Initial moves often retrace.
How JournalPlus Tracks Trailing Stops
JournalPlus logs your entry, initial stop, and exit prices to calculate how effectively you trailed your stops. You can analyze whether your trailing method captured the move or exited prematurely, helping you optimize trail distances for different market conditions.
