A dynamic stop-loss order that automatically adjusts in the direction of a profitable trade, maintaining a set distance from the highest price reached. Trailing stops lock in profits as the trade moves favorably while still allowing room for normal price fluctuations.
Why It Matters
- 1Trailing stops help prop traders protect profits without setting arbitrary take-profit levels.
- 2In trending markets, a trailing stop lets winners run while guaranteeing a minimum profit once the trade moves in your favor.
- 3This is especially valuable in prop firm evaluations where you need to build profits steadily toward the target.
- 4A well-placed trailing stop can capture large trending moves that a fixed take-profit would have exited too early, while ensuring you don't give back all gains if the trend reverses.
Example
- 1You enter long ES at 4,500 with a 10-point trailing stop.
- 2Initially, your stop is at 4,490. The market rallies to 4,520 — your trailing stop moves up to 4,510, locking in at least 10 points of profit.
- 3The market continues to 4,535 (stop now at 4,525), then reverses.
- 4You're stopped out at 4,525 for a 25-point ($1,250/contract) profit.
- 5Without the trailing stop, a fixed take-profit — for example, a 15-point target at 4,515 — would have captured only $750 per contract, missing the additional $500 in profit the trailing stop captured.
Common Mistakes
- ✖Setting the trailing distance too tight, causing premature stop-outs on normal retracements
- ✖Not adjusting the trailing distance based on the instrument's typical volatility
- ✖Using trailing stops in choppy, range-bound markets where they get triggered by noise