Traders often face the challenge of protecting profits while staying in a profitable trend for as long as possible. One of the most effective tools for achieving this balance is the trailing stop-loss strategy. Unlike traditional stop-loss orders, trailing stops automatically adjust to market movements, locking in gains and minimizing emotional decision-making. This guide explores how trailing stop-loss strategies work, key implementation methods, and practical examples to help you optimize your trading approach.
How Does a Trailing Stop-Loss Order Work?
A trailing stop-loss order is a dynamic risk management tool that follows the market price at a set distance. When you open a long position, the stop level rises as the price increases, maintaining a fixed gap. However, if the price reverses and hits that trailing level, the order triggers, closing the trade to secure profits or limit losses.
This mechanism ensures you remain in a trending market longer than with a static stop-loss, exiting only when momentum shifts. Because it adjusts automatically, it’s ideal for traders who can’t monitor positions constantly.
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Popular Trailing Stop-Loss Strategies
Strategy 1: Average True Range (ATR)
The Average True Range (ATR) measures market volatility over a specified period, making it an excellent basis for setting adaptive trailing stops. Instead of using a fixed percentage or pip value, ATR accounts for current market conditions—wider stops in volatile markets, tighter ones in calmer environments.
Most traders use a multiple of ATR, such as 2x or 3x, to avoid being stopped out by normal price fluctuations.
- 1x ATR: Too tight—likely to trigger prematurely during minor pullbacks.
- 2x ATR: Offers better protection and keeps you in longer trends.
- 3x ATR: Provides even more room, suitable for volatile assets.
- 3.5x ATR: Maximizes trend participation, especially in strong directional moves.
For intraday trading, apply ATR on hourly charts; for longer-term positions, daily ATR values are more appropriate. The key is aligning your multiplier with your trading style and asset volatility.
Strategy 2: Moving Average (MA)
Another powerful method uses moving averages as dynamic trailing stops. Common choices include the 20-period simple moving average (SMA) or exponential moving average (EMA), which closely track price action.
When the price stays above the MA in an uptrend (or below in a downtrend), the position remains open. Only when price crosses the moving average does the system signal an exit—typically indicating trend exhaustion.
For example, during Alibaba’s bullish run from October 2019 to January 2020, a 20-period EMA trailing stop would have kept traders in the trade throughout the entire upward move, exiting near the peak.
While both ATR and MA strategies are effective, they share a limitation: they are lagging indicators. Sudden price spikes or news-driven volatility may trigger premature exits before the trend resumes.
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What Is a Good Percentage for a Trailing Stop-Loss?
There’s no universal “best” percentage, but common benchmarks exist:
- For stocks, many traders use 15% to 20% trailing stops. This range balances protection with room for normal volatility.
- For forex pairs, where daily moves are smaller (typically 0.5%–2%), fixed pip-based stops are more effective. Most forex traders prefer 15 to 20 pips depending on the pair and timeframe.
Alternatively, calculate stop distance based on historical volatility. Highly volatile stocks or crypto assets may require wider buffers to avoid early exits.
Real-World Example: Trailing Stop in Forex Trading
Imagine opening a long position on EUR/USD at 1.1200 with a 15-pip trailing stop. Your initial stop-loss is set at 1.1185.
As the market rises to 1.1300, your unrealized profit reaches 100 pips. Simultaneously, the trailing stop climbs to 1.1285, always maintaining the 15-pip gap.
Later, negative news from the Eurozone causes a drop to 1.1250. Since this doesn’t reach your trailing stop level, the trade stays open. But if it had fallen below 1.1285, the order would execute, locking in 85 pips of profit—far better than breaking even or losing money.
This demonstrates how trailing stops protect gains without requiring constant supervision.
Stop-Loss vs. Trailing Stop-Loss: Key Differences
| Feature | Stop-Loss Order | Trailing Stop-Loss Order |
|---|---|---|
| Fixed or Dynamic | Fixed level | Moves with price |
| Profit Protection | None beyond initial setting | Automatically locks in gains |
| Exit Timing | May exit too early or too late | Adapts to trend continuation |
| Best For | Range-bound markets | Trending markets |
In short: a traditional stop-loss protects against downside risk from entry, while a trailing stop evolves with winning trades.
How to Set a Trailing Stop on MT4
MetaTrader 4 (MT4) is one of the most widely used platforms for forex and CFD trading. Here’s how to enable a trailing stop:
- Open MT4 and place a trade with a standard stop-loss.
- Press Ctrl+T to open the Terminal window.
- Right-click your active position under the “Trade” tab.
- Select Trailing Stop > choose distance (e.g., 15 pips).
- The platform will now automatically adjust your stop as price moves favorably.
Note: The trailing stop only activates once you’re in profit by at least the specified amount.
Understanding Trailing Stop-Limit Orders
A trailing stop-limit combines features of both stop and limit orders. It specifies two levels:
- Stop price: Triggers the order when hit.
- Limit price: Sets the minimum acceptable execution price.
For example:
- Buy at $50, set trailing stop at $5 below.
- As price rises to $60, stop moves up to $55.
- If price drops suddenly to $54, the order triggers—but only executes if someone buys at $55 or higher.
Unlike a regular trailing stop (market order), this prevents slippage but risks non-execution in fast-moving markets.
Trailing Stop-Loss vs. Trailing Stop-Limit
- Trailing Stop-Loss: Market order—guaranteed execution, possible slippage.
- Trailing Stop-Limit: Limit order—no slippage below limit, but execution not guaranteed.
Choose based on market liquidity and your priority: certainty of exit or control over price.
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Frequently Asked Questions (FAQ)
What is the main advantage of a trailing stop-loss?
It automatically protects profits during strong trends while keeping you in the trade until momentum reverses—eliminating emotional decisions about when to exit.
Can I use trailing stops for short selling?
Yes. In a short position, the trailing stop rises with falling prices and closes the trade if price rebounds to the trigger level—limiting losses if the downtrend ends.
Are trailing stops available on all trading platforms?
Most major platforms—including MT4, MT5, and OKX—support trailing stops. Some require manual setup; others offer automated rule-based execution.
Do professional traders use trailing stops?
Yes, many professionals combine trailing stops with technical levels (like support/resistance or moving averages) for precise risk control.
Can I backtest my trailing stop strategy?
Absolutely. Use historical data on platforms like MT4 or TradingView to test different ATR multipliers or MA periods across various assets and timeframes.
Is a tighter trailing stop always better?
No. Too tight, and you risk being stopped out by normal volatility. Too wide, and you give back too much profit. Optimize based on asset behavior and your risk tolerance.
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