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Managing trades effectively means knowing not only when to enter the market but also when to exit. One tool that helps traders protect profits without constantly monitoring the charts is the trailing stop loss. Unlike a fixed stop, it moves with the market, adapting to price changes and helping to limit downside risk. In this article, we’ll explain what a trailing stop loss is, how it works, how to set it, and why it’s useful across different trading strategies and market conditions.
What Is a Trailing Stop Loss?
A trailing stop loss is a type of stop-loss order that adjusts automatically as the market price moves in your favour. Unlike a traditional stop-loss, which is fixed at a certain level, a trailing stop “trails” the market price by a set distance — either by points, pips, or percentage.
If you’re going long (placing a buy trade), then the trailing stop needs to be placed below the market price. Conversely, if you’re going short (placing a sell trade), the trailing stop should be set above the market price. This ensures your stop is always positioned to protect your trade if the market moves against you.
For example, if you buy a Tesla stock at $300 and set a 5% trailing stop, the stop loss will initially be placed at $285. As the market price rises, the stop loss moves up by 5% below the highest price reached. If the price increases to $330, the trailing stop will shift to $313.50. However, if the price begins to fall, the stop remains fixed at its last adjusted level, helping you lock in profits or limit losses.
How Does a Trailing Stop Loss Work?
A trailing stop loss works by automatically adjusting your stop level as the market moves in your favour. Unlike a fixed stop loss, it doesn’t stay static — it follows the price at a set distance, locking in profits as the trade becomes more favourable.
The trailing stop remains inactive until the market price moves beyond your entry point. Once that happens, it trails the highest (for buy trades) or lowest (for sell trades) price by the specified distance. If the market reverses by that distance, the stop loss is triggered, and the position is closed.
How to Set a Trailing Stop Loss
Knowing how to set a trailing stop loss depends on your strategy, risk tolerance, and the asset’s volatility. Here’s a step-by-step guide:
1. Choose your trailing distance
Start by deciding how far you want your trailing stop to follow the market price. This could be a fixed number of pips or points, such as 50 pips in a forex trade or 5 points in an index trade. Alternatively, you can use a percentage-based approach — for example, placing the stop 2% below the market’s highest price. Some traders use technical indicators like the Average True Range (ATR) to set a distance that reflects the asset’s current volatility.
2. Set the order on your trading platform
Once you’ve determined the distance, go to your trading platform and locate the trailing stop function. On most platforms, like MT4 or the VT Markets app, this option is available in the order settings. After opening a position, you can right-click on the trade, select “Trailing Stop,” and choose a preset value or enter a custom distance.
3. Monitor and adjust if needed
After your trailing stop is active, it’s essential to monitor how it behaves in live market conditions. In fast-moving or highly volatile markets, you may need to widen the trailing stop to avoid being stopped out too early. In calmer conditions, a tighter stop could help secure smaller profits more frequently. Adjusting the distance according to price action can improve the effectiveness of this tool.
Example of a Trailing Stop Loss in Action
To better understand how a trailing stop loss functions in real market conditions, let’s look at two practical examples — one for a long (buy) position and another for a short (sell) position. These scenarios will show how trailing stops adjust automatically as prices move and help lock in gains or minimise losses without manual intervention.
Long Position Example (Buy Trade)
Imagine you enter a long position on XAUUSD (gold) at $3,000 and set a $20 trailing stop. At the time of entry, your stop loss is placed at $2,980. As the market moves up:
- When the price reaches $3,020, your stop loss adjusts to $3,000
- If the price continues to rise to $3,050, the stop moves to $3,030
- But if the price then drops to $3,030, your stop loss triggers, and the position closes
In this case, even though you didn’t manually take profit, the trailing stop captured a $30 gain as the trade moved in your favour and protected you when the gold market turned.
Short Position Example (Sell Trade)
Now consider a short position on EUR/USD, entered at 1.1000 with a 50-pip trailing stop. Since you’re selling, the trailing stop is placed above the entry at 1.1050. As the market drops:
- If the price falls to 1.0950, the stop loss moves down to 1.1000
- When the price hits 1.0900, the stop adjusts further to 1.0950
- If the market then rebounds to 1.0950, the position is closed
Here, your short trade gains 100 pips, and the trailing stop locks in profit automatically once the market reverses by the set amount.
Discover the differences between a long position and a short position.
Benefits of the Trailing Stop Loss
Using a trailing stop loss can bring several advantages:
1. Automatically Locks in Profits
A trailing stop loss moves with the market when it moves in your favour, helping you protect gains as they build. Once the price reverses by the set distance, the stop triggers and closes your position at a profit.
2. Reduces Emotional Trading
By automating the exit process, a trailing stop removes guesswork and emotional decision-making. This helps traders stay consistent and avoid common pitfalls like holding onto trades for too long or exiting too early.
3. Follows the Trend Without a Fixed Target
Trailing stops are designed to keep you in the trade as long as the trend continues. Instead of setting a fixed take-profit level, the stop adjusts dynamically, giving you the chance to capture extended moves.
4. Offers Protection in Fast-Moving Markets
During high volatility, the market can reverse quickly. A trailing stop helps limit losses by closing your trade automatically when the market turns against your position, even if you’re not actively monitoring the screen.
Risks and Limitations of the Trailing Stop Loss
Like any tool, a trailing stop isn’t perfect:
1. May Trigger Too Early in Volatile Markets
In choppy or highly volatile conditions, a tight trailing stop can get activated prematurely. This could close a trade before it has a chance to recover and move further in your favour.
2. Requires Careful Distance Selection
If the trailing distance is set too wide, it might not protect your capital effectively. But if it’s too tight, normal price fluctuations can stop you out too soon — finding the right balance takes practice and market understanding.
3. Doesn’t Guarantee Profit
While trailing stops help protect gains, they do not ensure a profitable outcome. If the market fails to move far enough before reversing, the trade could still close at a small loss.
4. Less Effective in Sideways Markets
Trailing stops are best suited for trending conditions. In sideways or ranging markets, price movements may frequently hit the stop level, resulting in frequent, low-return exits.
Trailing Stop vs Traditional Stop Loss: The Key Differences
While both trailing and traditional stop losses are used to manage downside risk, their mechanics and objectives differ. A traditional stop loss is fixed at a specific price level and remains unchanged once placed, offering straightforward protection against losses. In contrast, a trailing stop loss moves with the market when the price shifts in your favour, allowing you to protect profits while still giving the trade room to develop. This makes trailing stops more flexible and particularly useful in trending markets, whereas traditional stops are better suited for predefined exit strategies in range-bound or less volatile environments.
| Feature | Traditional Stop Loss | Trailing Stop Loss |
| Stop level | Fixed at a predefined price | Adjusts dynamically as price moves |
| Profit Protection | No | Yes — locks in gains as the market moves |
| Best Use Case | Sideways or uncertain markets | Trending markets with clear momentum |
| Strategy Type | Static — requires manual changes | Dynamic — adjusts automatically |
| Response to Market Reversals | Triggers at the fixed level | Triggers only after the trailing threshold is hit |
In Summary
A trailing stop loss is a flexible risk management tool that moves with the market to help lock in profits while limiting downside risk. Unlike a fixed stop loss, it adjusts automatically as the price moves in your favour, making it especially useful in trending markets. By understanding how a trailing stop works and learning how to set a trailing stop loss correctly, you can enhance your trading strategy and control your trades more effectively.
Start Trading Today with VT Markets
VT Markets is a reliable broker that supports trailing stop orders on both MetaTrader 4 (MT4) and MetaTrader 5 (MT5), giving traders the flexibility to manage risk dynamically across forex, stocks, indices, precious metals, and more. With competitive spreads, advanced order types, powerful trading tools, real-time execution, and step-by-step guidance in our Help Centre, you can easily set up trailing stops to protect profits and respond to market movements with confidence.
Open your account with VT Markets today and take control of your trading strategy.
Frequently Asked Questions (FAQs)
1. What is a trailing stop loss?
A trailing stop loss is a type of order that automatically adjusts your stop level as the market moves in your favour. It helps protect profits by locking in gains while still allowing your trade to stay open as long as the trend continues.
2. How does a trailing stop loss work?
A trailing stop loss works by following the market price at a set distance — either in points, pips, or percentage. If the market moves in your favour, the stop level moves with it. But if the market reverses by that set amount, the position is closed automatically.
3. How to set a trailing stop loss?
Start by choosing a trailing distance — either a fixed number of pips, points, or a percentage. Then, on platforms like MT4 or the VT Markets app, select “Trailing Stop” from your order settings and apply it to an open trade. Once active, monitor the market and adjust the distance if needed based on volatility.
4. What is the best distance to set for a trailing stop?
There’s no one-size-fits-all. Use tools like ATR or a percentage of the asset’s price to decide based on volatility.
5. Can a trailing stop guarantee profits?
No. It helps protect potential gains but doesn’t ensure you’ll make money if the market reverses before the stop adjusts.
6. Can I use a trailing stop on all asset classes?
Yes, trailing stops can be used across multiple asset classes, including forex, indices, commodities, and stocks, as long as the trading platform and broker support them.
7. Can I combine a trailing stop with other exit strategies?
Yes, many traders use trailing stops alongside partial take-profits, breakeven stops, or time-based exits to manage trades with greater flexibility and control.
