Trailing Stop Orders in Trading: Basic Concepts and 6 Practical Application Strategies

Trader’s Challenge: When to Take Profit, When to Cut Losses?

Deciding when to close a position is one of the most difficult aspects that any trader must face. You might encounter situations where your position is in profit but you are overly worried that the market will reverse. Conversely, when your position is at a loss, you hesitate between cutting losses immediately or waiting for a recovery. Both cases lead to emotions replacing discipline, thereby harming trading results.

To address this issue, many modern trading platforms have developed automatic risk management tools, among which trailing stop orders are one of the most effective solutions. This tool helps traders minimize emotional decisions and optimize capital management strategies.

What Is a Trailing Stop Order?

A trailing stop is a type of dynamic stop-loss order that automatically adjusts the stop level according to the market price movement without manual intervention by the trader. Instead of setting a fixed price, you establish a fixed distance (in pips or percentage) relative to the current highest price.

How it works:

• For a long position (Long): the trailing stop increases as the price rises but never decreases
• When the price falls below the set threshold, the order executes, and you automatically exit the position
• The main advantage is allowing you to follow the upward trend without manual intervention

If you set a 10% trailing stop for a Long position, the order will take profit if the price drops 10% from the highest level since you entered.

How Trailing Stop Orders Work: Real-Life Scenarios

Case 1: Using Fixed Pips

Suppose USDJPY is trading at 107.852 and you forecast the price will rise. You buy at this level and set a trailing stop of 10 pips, meaning the initial stop-loss order is at 107.842.

The next day, the price increases by 50 pips to 107.902. The trailing stop also automatically moves up to 107.892. Two days later, the price drops back to 107.900 but the stop remains at 107.892 (not moving down).

Then, the price hits a new high at 107.922, and the trailing stop moves up to 107.912. When the market declines and hits 107.912, the order executes, and you gain 60 pips.

Case 2: Using Percentage

You enter a Short position at USDJPY 126.332 with a 10% trailing stop. After entering, the price rises straight to 139.219 (more than 10%), triggering the stop-loss. In this case, the trailing stop functions exactly like a regular stop loss, both stopping at 10%.

Setting a Trailing Stop on a Trading Platform

Most modern trading platforms allow you to set a trailing stop directly when opening a position. The process is usually very simple:

1. Enter the number of pips or percentage you want to trail
2. Select the “Trailing Stop” option
3. The order will automatically update according to market price

The benefit of setting it at order entry is automation—you don’t need to monitor the market minute-by-minute to adjust the stop-loss level. If you haven’t decided on the optimal trailing level, you can also add this order after opening the position.

Determining the Appropriate Trailing Stop Level

The biggest challenge when using a trailing stop is setting it at a reasonable level. If too tight, the order may execute due to normal market fluctuations, leading to early losses. If too wide, you risk large losses or unnecessary profit loss.

General rules:

• Highly volatile markets → set a wider trailing stop
• Low volatility markets → set a trailing stop close to the market price
• There is no absolute formula for all markets—you need to analyze each asset individually

Advantages and Disadvantages of Trailing Stops

Advantages:

▶ Maximize profits: No limit on take-profit levels, allowing you to follow the upward trend as long as the market remains favorable. This solves the problem of prematurely closing profits with fixed limit orders.

▶ Automation and time-saving: You don’t need to constantly update or adjust orders—all is automatic.

Disadvantages:

▶ Difficult to execute orders: When prices fluctuate rapidly or assets have low liquidity, it may be difficult to execute the order at the exact trailing stop level.

▶ Risks with highly volatile assets: Trailing stops are ineffective during abnormal large market swings.

▶ Reduced active analysis: Relying on automatic orders may cause you to miss opportunities for in-depth analysis and making informed entry and exit decisions.

6 Trading Strategies with Trailing Stop Orders

Strategy 1: Trailing According to Acceptable Risk Level

Determine your acceptable loss (called R), then set the trailing stop at 1R, 2R, or nR depending on market volatility. For highly volatile markets, choose 2R or more to avoid premature stop-outs. For low volatility markets, choose 1R to maximize profit protection.

Strategy 2: Using Parabolic SAR

Parabolic SAR is a technical indicator that identifies when momentum is exhausted. When candles approach the SAR point, it signals a potential reversal. Place the trailing stop near the closest SAR point to secure profits before reversal occurs.

Strategy 3: Trailing Stop Based on X Candles Prior

Use the highest/lowest price of the previous X candles. For example: if in a Short position, set the trailing stop at the high of the last 3 candles; if in a Long position, set at the low of the last 3 candles. You can adjust the number of candles based on your trading horizon (short/long term).

Strategy 4: Trailing Stop at Support-Resistance Levels

This is a simple yet effective method. Just place the trailing stop at key support/resistance levels identified beforehand. If unsure about exact peaks/troughs, these levels are a safe choice.

Strategy 5: Bar Plus - Add ATR

Similar to the X candles strategy, but the trailing stop is set at the high/low of the current candle plus a percentage of the Average True Range (ATR). For example: if ATR is 60 pips, add 50% of it (30 pips) to the previous high/low.

Strategy 6: Trailing Stop Based on Moving Average

Set the trailing stop to slide along with the Moving Average line. SMA20 or EMA20 are popular choices, but you can increase/decrease the period depending on your long-term or short-term trading needs.

Frequently Asked Questions

When should I use a trailing stop order?

This order is most effective when the market is trending clearly. It helps protect current profits while allowing further gains if the trend continues. Avoid using during sideways (range-bound) markets.

Is a trailing stop order safe?

Yes, it is very safe and effective when the market is in a strong trend. It both protects profits and cuts losses promptly when the price reverses.

Conclusion

Trailing stop orders are powerful tools to maximize profits and manage risks effectively. If you don’t have time to constantly monitor price charts, this is an excellent solution to automate your exit strategies while maintaining the highest possible profit rate.

Choosing the appropriate trailing stop level depends on your trading style (short/long term) and the volatility of each asset. Hopefully, the strategies and guidelines above will help you use trailing stops more effectively in future trades.