A trailing stop loss strategy moves your stop in the direction of the trade as price moves, so a winner can run while more of the open profit is protected. Price action traders usually trail behind market structure: under each new higher low in an uptrend, above each new lower high in a downtrend. The stop only ever moves one way, and it never moves back.
Quick answer: what is a trailing stop loss strategy?
It is a set of rules for moving your stop as a trade works: 1) start with a normal stop, 2) once price makes a new confirmed swing low (or high, for a short), move the stop just beyond it, 3) never move it back. The trail suits trends; in ranges a fixed stop and target usually work better.
How a trailing stop works
A fixed stop stays where you placed it until the trade ends. A trailing stop follows price at a distance, rising behind a long and falling behind a short. Most platforms offer an automatic trail at a set number of pips or points, but you can also trail by hand, moving the stop yourself when the chart gives a reason.
Every trailing method starts with a sensible initial stop. Our guide on where to place a stop loss with price action covers that first step; this article is about what happens next.
Structure-based trailing behind swing lows and highs
This is the method we use most. In an uptrend, price makes a series of higher lows, and each one is a place where buyers stepped in. If price later falls below the latest higher low, the structure has changed, so that is where the stop belongs.
- Wait for a confirmed swing low. Price must pull back, form a low, then rally clearly away from it. Our guide on how to identify market structure shows what counts as a swing.
- Move the stop just below it. Add a small buffer for the spread, so a brief poke through the low does not take you out.
- Repeat with each new higher low. Leave the stop where it is until the next swing is confirmed.
- Never move it back down. A trailing stop that retreats is no longer a stop.
For a short, reverse it: trail above each new lower high. The method suits clean trends, which is why spotting the start of a new trend with price action comes first.
ATR-style trailing, explained without magic numbers
The average true range, or ATR, is an indicator that measures how far price typically moves per candle over a set number of candles. An ATR trail keeps the stop a multiple of that figure away from price. When the market gets more volatile, the stop sits further away; when it calms down, it sits closer.
You will see specific multipliers and look-back periods quoted as “best”. We have found no independent evidence for any single setting, so we do not recommend one. A small multiple keeps more profit but gets hit by normal noise; a large one rides pullbacks but gives more back. Test any setting on your own market and timeframe before trusting it.
| Factor | Trailing stop | Fixed stop and target |
|---|---|---|
| Best market | Clear trends | Ranges and zones |
| Exit known in advance | No | Yes |
| Catches big moves | Yes | Only up to the target |
| Gives back profit | Some, by design | Rarely, if the target is hit |
| Screen time | More, if trailed by hand | Less |
When trailing hurts
Trailing is not free. In a range, price swings back and forth, so a trail catches a dip and closes the trade just before the move you wanted. In those conditions a fixed target at the next level, as in our guide on how to take profit with written exit rules, is usually the better tool.
- Trailing too early. Moving the stop to breakeven after a few pips turns ordinary pullbacks into stop-outs.
- Trailing too tight. A stop inside the market’s normal swing is noise insurance you pay for repeatedly.
- Choppy trends. Deep, messy pullbacks undercut swing lows even when the trend survives.
Research on this cuts both ways. Kaminski and Lo showed that stop-loss rules cut expected returns when prices move randomly, but can add value when prices trend. A study of US stocks from 1926 to 2016 by Dai and colleagues found trailing rules reduced downside risk at the cost of lower average returns, with trading costs wearing away the benefit of tight rules. Both looked at stock investing, not leveraged trading, but the trade-off is the same: less pain on the way down, less gain on the way up.
Gaps and slippage: what a stop cannot promise
A stop is an instruction to close at the next available price once your level is reached. If the market gaps past it, for example over a weekend or after major news, your fill can be well beyond the stop. A trailing stop has the same weakness as any other stop.
Slippage also rises in fast markets and thin trading hours. We avoid holding tight trailing stops through scheduled high-impact news, one of the conditions in our guide on when not to trade and stay flat.
Worked example: trailing a long behind swing lows
Example, using hypothetical figures on a £5,000 account where we risk 1% per trade, or £50. We buy a hypothetical currency pair at 1.2500 with a stop at 1.2450, 50 pips of risk, so the size is £1 per pip on a spread bet.
- First trail: price rises to 1.2600, pulls back to a low at 1.2560, then rallies to 1.2640. The swing low is confirmed, so the stop moves to 1.2552, locking in 52 pips, or £52.
- Second trail: a new higher low forms at 1.2610 and price breaks above 1.2660. The stop moves to 1.2602, locking in 102 pips, or £102.
- The gap: the market opens on Monday at 1.2580, below the stop. The trade closes there, for 80 pips, or £80, not the £102 the stop suggested.
Spread bets and CFDs are leveraged, so a larger gap could turn a locked-in profit into a loss, and losses can exceed what you planned to risk. The sizing step is in our guide on how to calculate position size for spread bets and CFDs.
Common mistakes with a trailing stop loss strategy
- Trailing on an unconfirmed low. Wait until price has clearly left the swing.
- Loosening the stop. Moving it back to give the trade “room” undoes the whole method.
- Using a trail in a range. Match the exit to the market, not to habit.
- Assuming the stop price is the exit price. Gaps and slippage say otherwise.
Frequently asked questions
How far should a trailing stop be from price?
Far enough that the market’s normal swings do not reach it. With structure-based trailing, the swing low sets the distance; with an automatic trail, test the distance against recent pullbacks on your timeframe.
Is a trailing stop better than a fixed stop?
Neither is better in every market. Trailing suits trends where the next target is far away or unclear, while a fixed stop and target suit ranges and well-defined zones.
When should I start trailing my stop?
We start once price has made its first confirmed swing in our favour, not after a set number of pips. Trailing before that tends to stop you out on the first normal pullback.
Can I use a trailing stop and a take-profit together?
Yes, and many traders do. A common approach is to take part of the position at a fixed target and trail the stop on the rest.
Next steps
Trailing is one part of a wider risk plan. Our guide to building a rules-based risk model shows how stops, targets and position size fit together.
Discovering the beginning of new trends and building a rules-based risk model are both covered in our price action trading course, and the basics section is free to start.
This article is for education only and is not financial advice. Trading leveraged products such as CFDs and spread bets carries a high risk of losing money.
