A trailing stop is a stop or stop-limit order whose trigger is not a fixed price. The trigger is set as a dollar amount or a percentage away from the market price. When the price moves in your favor, the trigger follows it. When the price moves against you, the trigger stays where it is. The SEC's Office of Investor Education and Advocacy describes it this way. Once the price comes back to the trigger, the order is activated. Reaching the trigger does not fix the price you sell at.
How the trigger moves
The SEC's investor bulletin on stop, stop-limit and trailing stop orders gives this example. You buy shares of a stock, XYZ, at $20, and the price rises to $22. You place a sell trailing stop $1 below the market price. While the price rises, the stop stays $1 below it. XYZ peaks at $24 and then falls, so the stop stays at $23. The shares are sold when XYZ reaches $23, "though the execution price may deviate from $23."
The How The Market Works glossary gives a longer dollar example:
- A stock is bought at $30 and rises to $35. A $3 trailing stop puts the selling point at $32.
- The price rises to $37. The stop moves up to $34.
- The price reaches $39.50. The stop moves up to $36.50.
- The price dips and then recovers to $38. That is not a new high, so the stop stays at $36.50.
The arithmetic
For a sell (long) position:
- Dollar trail: trigger = highest price since the order was placed − dollar amount
- Percentage trail: trigger = highest price × (1 − trail %)
The glossary's percentage example uses a 10% trail on the $39.50 high: 39.50 − 10% × 39.50 = $35.55.
| Highest price | Trail | Trigger |
|---|---|---|
| $24.00 | $1 | $23.00 |
| $35.00 | $3 | $32.00 |
| $39.50 | $3 | $36.50 |
| $39.50 | 10% | $35.55 |
Short positions
For a short position, which profits when the price falls, the trailing stop goes above the market price. Colibri Trader describes it this way: the stop follows the price down while the trade is profitable and holds its lowest level if the price rebounds. When it triggers, it closes the position with a buy order.
What happens when it triggers
Two things decide the actual exit.
The order type behind the stop. A plain stop order "becomes a 'market order' when the 'stop price' is reached," FINRA said in Regulatory Notice 16-19 (May 26, 2016). The same notice warns that "the execution may be at a significantly different price from the stop price if the market is moving rapidly." A stop-limit order sets a worst acceptable price instead. FINRA's warning for that case: "there is the possibility that the order will not be executed at all." Because the SEC defines a trailing stop as either a stop or a stop-limit order, each version carries the matching risk: a market-order trailing stop may fill at a worse price, and a limit version may not fill at all.
What counts as "reaching" the trigger. The SEC bulletin notes that trading venues use different standards. "Some exchanges use only last-sale prices to trigger a trailing stop order, while other venues use quotation prices." It also says these order types may not be available through every brokerage firm.
Where does a percentage trailing stop sit?
Enter the highest price since you placed the order and your trail percentage to see where a sell trailing stop would trigger.
| Highest price since the order was placed | Trail distance below the high | Sell trailing stop trigger price |
|---|---|---|
| 39.5 $ | 10 % | 35.55 $ |
| 39.5 $ | 10 % | 35.55 $ |
| 10 $ | 10 % | 9 $ |
| 100 $ | 10 % | 90 $ |
- Both values are your own inputs; the defaults reproduce the article's 10% trail on a $39.50 high, which gives $35.55.
- The trigger only moves up when a new high is set; if the price falls, the trigger stays where it is.
- This covers a sell (long) trailing stop. For a short position the stop sits above the price and the trigger is the lowest price × (1 + trail %).
This shows only the trigger price: it cannot tell you the price you will actually get, whether a limit version fills at all, or whether your venue triggers on last trades or on quotes.
Choosing the trail distance
The distance is the setting that matters most.
- Too tight: "Rapid price movement during a short period of time could trigger a stop order," FINRA's investor guidance (March 26, 2025) says. FINRA's notice adds that the price can recover after the stop has already sold. The SEC makes the same point about trailing stops: short-term price swings can activate them, so the trail should be chosen with care.
- Fixed dollars don't scale: The glossary notes that a $1 trailing stop "might be fine at 10$ but wouldn't be if your stock had increased to 100$." A percentage trail grows with the price. A dollar trail does not.
Fairmont Equities describes four ways some traders set the distance:
- A fixed percentage, adjusted for volatility, time frame and risk tolerance.
- A multiple of ATR (average true range), which measures average daily price movement.
- Below recent lows or support levels, moved up as new support forms.
- A moving average, such as a 20-period EMA or a 50-period SMA, used as a moving stop level.
Where trailing stops struggle
Colibri Trader calls trailing stops trend-following tools. It says that in "choppy, sideways, or range-bound markets," the stop can be hit again and again for small losses as the price swings back and forth. Fairmont Equities makes a similar point: in choppy markets, small dips can trigger the stop too early and cut off gains. It also says a gap down or low liquidity can mean a sale at a worse price than expected.
Before you place one
These questions follow from the SEC and FINRA material above:
- Does the trailing stop send a market order or a limit order when it triggers?
- Is the trigger based on the last trade price or on quotes?
- Is the trail a dollar amount or a percentage, and does that still make sense if the price moves a long way?
- How does the trail compare with the asset's normal short-term swings?
Related reading: how a crypto day trade works and what it costs, cross vs isolated margin and liquidation risk, and what a liquidation heatmap shows.
Limitations: the SEC and FINRA guidance is written for US securities markets, and the numbers in the examples are illustrations, not real trades. This is not trading or investment advice.
