How to properly use trailing stop: Automatic profit protection explained

The trailing stop is an order type that allows traders to secure their profits without constantly monitoring the market. This automated strategy adjusts to price movements and helps maximize profit potential while limiting losses.

What is a trailing stop order?

A trailing stop functions like a movable safety line. Instead of setting a fixed exit price, you define a certain distance from the current market price. When the price rises, the trailing stop moves upward accordingly—always maintaining the same distance. Once the price reverses and falls by the defined amount, the sell order is automatically triggered.

This is especially valuable when a position is moving in the right direction, but you’re unsure how high the price can go. You don’t need to keep an eye on the position and can still benefit from upward movements while your profits are automatically protected.

Trailing stop percentage: flexible profit protection

In this variant, the distance is defined as a percentage of the current market price. This allows for flexible adjustment as prices rise.

Scenario 1: The current price is $100. You set a trailing stop at 10 percent below the trading price.

• If the price drops to $90 (a 10% decline), your order is automatically triggered and a sell order is placed.

Scenario 2: The price rises to $150. Your trailing stop moves up with it—remaining 10 percent below, at $135.

• If the price falls to $140, the order is not yet triggered because it hasn’t reached the $135 mark.
• Only at $135 would the order be executed.

Scenario 3: The price climbs to $200, with your trailing stop at $180.

• When the price declines to $180, the sell order is automatically placed at the market.

The percentage variant is especially suitable when working with different price levels, as the protection distance grows proportionally with the price.

Trailing stop fixed: constant protection distances

In this variant, you define a fixed dollar amount or other currency unit as the distance from the market price. The distance remains the same regardless of the price level.

Scenario 1: The current price is $100. You set a trailing stop at $30 below the market price.

• If the price drops by $30 to $70, the order is immediately triggered.

Scenario 2: The price rises to $150. Your trailing stop remains $30 below, at $120.

• A decline to $130 is not enough to trigger the order.
• The order is only triggered at $120.

Scenario 3: The price reaches $200, with a trailing stop at $170.

• When the price drops to $170, a sell order is placed.

This variant is ideal if you prefer consistent profit protection in absolute numbers, regardless of the price volume.

Activation price: effective application

Many platforms allow setting an activation price. This means the trailing stop only begins to work once the market price reaches this defined point. This enables targeted protection and prevents premature triggers from small price fluctuations.

Important points when using

Position and margin are not frozen: Your open position is not blocked by the trailing stop order. Ensure you have sufficient margin or available positions if the order is triggered.

Possible trigger errors: A trailing stop order may not trigger correctly under certain conditions—such as price limits, position restrictions, insufficient margin, or system failures. Even if triggered correctly, the resulting market order may not be executed, as with any regular market order.

Check open orders: Unfilled orders can be viewed and manually reassessed in your order management.

Frequently asked questions about trailing stops

When should I use a trailing stop? Use it when you want to secure profits in an uptrend but expect market fluctuations. It’s perfect for traders who cannot monitor constantly.

Is a trailing stop safer than a fixed stop-loss? Both methods have advantages. The trailing stop moves upward with the price, while the stop-loss remains fixed. Choose based on market conditions.

Can I change the distance afterward? This depends on your platform. Check the features of your trading tool.

Conclusion

The trailing stop is a practical tool to automatically benefit from upward movements and limit losses. By choosing between percentage-based and fixed distances, you can tailor the strategy to your individual needs. When combined with an activation price, the trailing stop becomes a flexible and efficient risk management tool.

However, no order technique offers 100% protection. Technical issues, market volatility, and liquidity shortages can have impacts. Test the trailing stop first on a demo account and only use it with capital you can afford to lose.