A trailing stop is a stop-loss order that follows price by a fixed distance as the trade moves in your favor, locking in unrealized profit. If price extends further into profit, the stop ratchets up (on a long) or down (on a short) to maintain that distance from the new high-water mark. If price reverses, the stop stays where it is — it tightens as the trade extends, but never loosens. Eventually price retraces enough to hit the trailed level, which exits the position at whatever profit the stop has captured by then.
Trail distance can be expressed in pips, in ATR multiples, or anchored to structural levels (e.g. trail one swing low behind price on an uptrend). Some brokers run trailing stops server-side; others only on the client platform — meaning if the platform disconnects, the trail freezes.
Formula
For longs:
Stop level = max(prior stop, current high - trail distance)
For shorts:
Stop level = min(prior stop, current low + trail distance)
Worked example
EUR/USD long entry at 1.0850, initial stop at 1.0820 (30-pip risk). Trail distance set to 25 pips, activated once price moves +20 pips into profit.
- Price hits 1.0870 — trailing activates. Stop moves from 1.0820 to 1.0870 - 25 = 1.0845 (now in profit).
- Price extends to 1.0900 — stop trails up to 1.0900 - 25 = 1.0875.
- Price extends to 1.0915, then reverses — stop trails to 1.0915 - 25 = 1.0890.
- Price retraces to 1.0890, stop hits, exit at 1.0890. Captured profit: 40 pips.
The trade never reached a fixed take profit; the trailing stop captured roughly 60% of the maximum favorable excursion (65 pips) — a typical trail efficiency.
Why it matters
Trailing stops let a trader participate in trend continuation without the cognitive cost of "should I take it now?" at every new high. Combined with a breakeven move at +1R, they transform a fixed-target system into a runner system that can occasionally capture 5-10R outliers — which is where most of the long-term edge in trend strategies actually lives.
Common pitfalls
- Setting trail distance too tight — gets shaken out on normal pullbacks, exits the trade before the move develops.
- Setting it too wide — ends up giving back most of the unrealized profit on the eventual reversal.
- Assuming server-side trailing when the broker only supports platform-side, then losing the trail during a disconnect.