Trailing stops definition

A trailing stop order (sometimes called a trailing stop limit order) is a type of stop-loss that automatically follows your position if it earns you profit. This can make them a useful addition to your risk management strategy – if your position moves favourably but then reverses, a trailing stop can lock in your profits before closing the trade.

The benefits of using a trailing stop

The biggest benefit of a trailing stop is that you no longer have to manually move your stop if your position moves in your favour, and you want to adjust your exposure accordingly.

If you leave a traditional stop on an open position that you don't, then readjust if you trade is profitable, then your position will only automatically close if it retraces back to where you originally placed your stop. Any profits that you could have taken from the position, had you closed it earlier, would be lost.

Trailing stops help prevent this from happening, protecting the profits on a successful trade as well as minimising losses.

How do I use a trailing stop?

On a long position, a trailing stop will be placed below the current market price of the asset being traded. On a short position it will be above the current market price. It is set at a percentage level or certain number of points away from the market price of the asset being traded, and as it moves it maintains that distance from the current price.

Trailing stop order example

You think the Germany 30 is entering into a bull market, so you decide to buy it at 12,555, with a trailing stop at 12,540. This allows the Germany 30 to move 15 points against you before the stop closes you out.

Since this is a trailing stop, you'll also need to enter a trailing step amount. The trailing step dictates how much the Germany 30 needs to move before your stop moves with it. So if you have set up your stop to move every time the Germany 30 moves five points, then it will move up to 12,545 when the Germany 30 hits 12,560, and so on.

The Germany 30 hits a high of 12,593 before retracting, meaning that the trailing stop will be triggered at 12,575, earning you a profit. If you'd used a normal stop on the trade, it would have closed your position at 12,540, earning you a loss.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.