A trailing stop is a stop loss that moves with the market in your favour, helping you lock in gains while still limiting losses. Here’s how it works and when to use it.
How a trailing stop works
You set a distance, say 20 pips. As the price moves in your favour, the stop follows at that distance, protecting more of your gain. If the price reverses, the stop stays put and closes the trade, it never moves backwards.
An example
You go long and set a 20-pip trailing stop. As the price rises 50 pips, the stop trails up behind it, now protecting much of that move. If the price then falls 20 pips from its peak, the trade closes, banking most of the gain instead of giving it all back.
When to use one
- Trending markets, where a move may run further than your original target.
- When you want to let winners run without watching the screen.
- To remove the temptation to exit too early, or too late.
Things to keep in mind
A trailing stop manages risk, but it isn’t magic, the right distance depends on the instrument’s volatility and your strategy. On MetaTrader 5, note that a client-side trailing stop may require the platform to be running. Practise on a demo to find what suits you.
- A trailing stop follows the price in your favour at a set distance
- It locks in gains while capping losses, and never moves backwards
- Best in trending markets to let winners run
- Set the distance to the market’s volatility, not too tight
This guide is educational only and is not investment advice or a promise of profit. Trading involves significant risk and may result in the loss of your capital.