GLOSSARY // Orders & Execution
Trailing Stop
A trailing stop follows price at a fixed distance, say $0.50 or 3%, ratcheting the trigger up as the stock rises but never lowering it. It converts an open-ended winner into a position with a defined maximum giveback.
The distance is the whole design decision. Trail too tight and normal noise stops you out of a trend; a stock with a $1.00 average true range will hit a $0.30 trail on nearly every pullback. Trail too wide and you donate back most of the move. Many traders key the distance off ATR, using 1.5-2x the recent range, so the stop breathes with the stock.
A trader buys at $40.00 with a 5% trailing stop, initially $38.00. The stock climbs to $50.00 and the stop ratchets to $47.50. On the pullback the position exits at $47.50, locking in $7.50 a share, while a fixed stop at $38.00 would still be risking the entire gain.
Put it to work
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.