Trailing step definition

What is a trailing step?

A trailing step is a measure of price movement and a key component of a trailing stop order a type of stop-loss order that follows your position if it earns you profit and closes if the market moves against you.

The value of a trailing step is set in pips. So, a trailing step of 50 pips would only move after 50 points of movement in the price of the asset.

The trailing step is one of the parameters you set to manage the how your trailing stop-loss follows the market price. It dictates how much the underlying market needs to move before your trailing stop re-adjusts. The larger your trailing step, the more the market has to move before your stop is re-positioned, and the less frequently the ‘trailing’ would be performed.

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Example of a trailing step

Let’s say you want to open a long position on the FTSE 100, which is currently trading at 7400. You decide to set your trailing stop 100 points away from the current market price, at 7300, and set a trailing step of 50 pips. This means that the market will have to move 50 points before the stop adjusts.

The FTSE increases in value, up to 7450, and your trailing step indicates that it is time for your stop to move to a higher level. Because your step amount is set to 50 pips, your stop-loss is now positioned at 7350.

If the FTSE increased by another 50 points, your stop-loss would adjust to the breakeven point. And if the FTSE rises by the same amount again, your trailing stop would be moved up to a positive 50 points, at 7450.

If the FTSE were to suddenly decline in price, falling back to 7400, your trailing stop would close your position at 7450 and you would still take a profit.

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