Glossary
Trailing Stop
A stop-loss that rises as the price climbs
A trailing stop moves the exit level up as the price rises. Set at 10% below the peak, the threshold rises automatically each time a new high is reached.
Unlike a fixed stop, it protects gains. Buy at 100, watch it reach 200, and a fixed stop at 90 can surrender the entire gain, while a trailing stop exits at 180.
Its strength is removing emotion. The rule acts regardless of how far the price has risen, reducing the chance of missing the exit while hoping for more.
Its weakness is triggering on normal fluctuation. Set too tight, it exits on a brief pullback and leaves you watching the recovery. The width must match the stock's usual volatility.
It suits long-term investing poorly. If the plan is to hold for years, interim declines are part of the deal, and a trailing stop keeps selling the position during exactly those stretches. If you use one, managing at the portfolio level rather than per position tends to work better.