A trailing stop is an order instruction whose trigger follows a favorable price movement by a specified distance or percentage. Once tracking begins, an unfavorable move does not loosen the trigger; a sufficient reversal activates the order.
Following a moving reference
For a sell trailing stop, the reference is the highest tracked price. Suppose tracking starts at $100 with a fixed $5 distance. The initial trigger is $95. If the tracked price reaches $112, the trigger rises to $107. A decline to $110 leaves it at $107; a further decline to the trigger activates the order.
A buy trailing stop works in the opposite direction, following the lowest tracked price and triggering on a rebound. Some platforms allow a separate activation price before tracking starts.
Trigger level versus execution price
The resulting order may be market or limit, depending on the product. A market order can experience slippage; a limit order can remain unfilled. Price gaps can therefore prevent an exit at the displayed trigger. The chosen reference price, activation rules and trailing unit must be checked, and a trailing stop does not guarantee a profit.