Trading glossary
Trailing stop
By the PatternX team · Published
Definition
A trailing stop is an exit level that follows price at a set distance as a trade moves in your favor and never moves back. If price reverses by the trail distance from its most favorable level since entry, the position is closed.
How it works
For a long position:
Stop level = highest price since entry × (1 − trail %)
For a short, the stop is the lowest price since entry × (1 + trail %). The level only ratchets in the trade's direction. Trails can also be set in dollars, as a multiple of average true range, or under each new swing low.
A trailing stop can be held by the broker as a native order, or run by software that tracks prices and sends an exit order when the level is crossed. A software trail depends on that software running and being able to reach the broker.
Why it matters
A trail lets a winning trade run while limiting how much of the gain you hand back. The cost is the distance you pick: a tight trail exits on ordinary noise, while a wide one returns more of the move before it triggers.
Example
For example, you buy a hypothetical stock at $10.00 with a 2% trail. Price climbs to $11.00, so the stop rises to $10.78. If a trading halt or a gap then takes the price straight from $10.95 to $10.60, the exit fills near $10.60, not at $10.78.
Common mistakes
- Treating the trail as a maximum loss.
- Setting a trail tighter than the stock's normal bar-to-bar movement.
- Forgetting that a software trail can't act while the software is offline.
How PatternX uses it
In Momentum Lab the default trail is 0.5% (1% for Momentum Reversal), with a hard stop 3% from the average fill. By default positions use the PatternX Synthetic Trail: the engine updates the high- or low-water mark every cycle and stores it, so it survives restarts. A broker-native trailing order is used only when every condition holds, including live mode, the preference switched on, an entry filled in the regular session and no hard stop, so with the default 3% hard stop it isn't used.
On PatternX's chart-pattern signals, the trailing stop and break-even are run by PatternX's software loop every 5 seconds and are not changed at the venue; the original stop-loss at the venue stays where it was. They work while PatternX is running and can reach the venue. More in trailing stops for momentum and risk controls.