Trailing stop loss order
Family II · Orders
Not to be confused with stop limit order, stop order, buy stop order.
Trailing stop loss order is a conditional order that maintains a stop price at a set distance from the current market price. As the market moves in the position's favour, the stop price follows, but it never moves against the position. If the market reverses by the specified distance, the order becomes a market order to close the position.
Mechanics
The distance is set by the trader, either as an absolute amount or as a percentage of the market price. The stop price is recalculated as the market moves, but only in the direction that reduces risk. For a long position, the stop rises with the market and never falls; for a short position, it falls and never rises.
Once the stop price is touched, the order is triggered and typically becomes a market order, though some venues may support a limit instruction. The actual fill may differ from the stop price due to slippage.
Worked example
A trader buys at 100.00 and places a trailing stop loss with a 5.00 distance.
The stop never moved below 95.00 and locked in a gain of 5.00 from the entry price.
Variations and risks
The distance may be specified in points, pips, ticks, or as a percentage, depending on the instrument and the broker's platform. Some brokers recalculate the stop only on certain price changes or at specific intervals, which can affect how tightly the stop follows the market.
In fast markets, the executed price may be worse than the stop price, and the trailing mechanism may not trigger at the exact level. Gaps can also cause the market to jump past the stop, resulting in a fill at the next available price.
Often confused with
- stop limit order
- A stop-limit order triggers a limit order at the stop price, so it may not fill if the market moves past the limit, whereas a trailing stop loss order typically triggers a market order and follows the market; the visible sign is the presence of a limit price alongside the stop price.
- stop order
- A stop order has a fixed stop price that does not move, while a trailing stop loss order adjusts its stop price with favourable market movement; the visible sign is whether the stop price changes over time.
- buy stop order
- A buy stop order is placed above the current market price to enter a long position or cover a short, whereas a trailing stop loss order is usually placed below the market to exit a long and trails upward; the visible sign is the order's direction relative to the market and its trailing behaviour.