How a trailing stop moves
The trail followed the price for a while, then a move went against you and the order fired at a level you never typed anywhere. Checking afterwards, the level it used does not correspond to any price you remember watching.
A trailing stop is an ordinary trigger whose level is recomputed rather than fixed. The recomputation is simple, deterministic, and driven by two things you cannot see in the order: an extreme of a reference price, and the arithmetic of an offset. Once those are visible, the level it fired at is the only level it could have fired at.
The level is derived, not stored
A conventional stop holds a number you chose. A trailing stop holds a rule for producing that number.
For a stop on a long position, the rule is: track the highest value the reference price has reached since the order became active, and set the level at that extreme minus an offset. For a short, the same with the lowest value and plus an offset.
The consequential half is what happens on an adverse move. The extreme is a high-water mark — it updates only when exceeded, never when the reference falls back. So the level moves in one direction and stops. It does not widen back out, it does not follow the price down, and there is no state in which it becomes less close than it was.
That gives the mechanism a property people misremember: the distance between the reference and the trigger equals the offset only at the extreme. Everywhere else it is smaller, by exactly the amount the reference has retraced.
Three parameters, and the one that is not yours
The reference price. A trail is a trigger like any other, so the venue is comparing a level to some price, and that price may be the last trade, the mark or the index. For a trail this matters twice over: the reference determines when the trigger fires and it determines what the extreme is an extreme of. A mark-referenced trail ratchets on index movement that never printed on the venue holding the order.
The offset. Either an absolute distance in price increments, or a proportion of the reference. The two diverge as the extreme moves: a fixed absolute offset keeps the same distance, while a proportional one grows in absolute terms as the extreme rises. Some venues fix the proportional offset in absolute terms at activation and some recompute it at every update, and those produce different levels.
The activation condition. Many implementations let the trail sit inert until the reference first reaches a threshold, after which the ratchet begins. Before activation there is no extreme, so an adverse move in the interim is not tracked by anything.
This site has no view on what any of these should be set to. What follows is only what each setting does.
What “the reference reached” means
The extreme is built from observations, so the question of continuous versus sampled evaluation applies to the ratchet as well as to the firing. An engine that updates the extreme on every price change will ratchet on a single print at an outlying price. One that samples periodically may never see that print at all, and the extreme will be lower.
This is the mechanism’s most awkward interaction with thin conditions. A single small aggressive order can produce one record on the tape at a price nobody else traded at, and on a last-referenced continuous trail, that record permanently moves the level closer.
Where the trail is computed
If the venue holds the trailing order, the ratchet runs inside the venue and continues whether or not anything of yours is connected.
If the trail is being maintained by the software in front of you — the venue holding only an ordinary stop whose level gets amended — then the ratchet stops when that software stops, and the level freezes wherever it last was. The order remains live at a stale level, which is a different failure from a disconnect policy that cancels, and harder to notice. Where the level is maintained by repeated amendment there is a further consequence: each amendment is normally a cancel and a replace, with everything that follows from that.
The mechanism
THE MECHANISM — a trailing level
· The order activates
→ the venue begins recording an
EXTREME of the reference price.
Level = extreme − offset.
· The reference makes a new extreme
→ level moves with it, keeping the
offset.
· The reference retraces
→ level does NOT move. Distance to
the trigger shrinks by as much.
· A single outlying print
→ on a continuous last-referenced
trail, it sets the extreme.
· Offset stated as a proportion
→ absolute distance grows with the
extreme. Recomputed differs.
· The level is reached
→ trigger spent. An ordinary child
order pays whatever it pays.
· The trail is maintained outside the
venue and that stops
→ level FREEZES. The order stays
live at a stale level.
· Reference, sampling, activation, offset
arithmetic, extreme visibility
→ VENUE-SPECIFIC. Two venues can
fire at different levels from
identical inputs.Worked example
Illustrative figures throughout, synthetic and round, describing no real venue.
Suppose a long position and a trailing sell with an absolute offset of 500, referencing the last traded price, activated when the reference is 40,000.
The extreme starts at 40,000, so the level is 39,500. The reference rises to 41,000: new extreme, level 40,500. It falls back to 40,600: the extreme is unchanged, so the level stays at 40,500 and the distance to the trigger is now 100 rather than 500. It rises to 41,200: new extreme, level 40,700. It then falls to 40,700 and the trigger fires. The child market order walks the bids and fills an average of 40,650.
Nowhere in that sequence did anyone type 40,700, and the order closed 500 below a price that was reached once.
The same trail with a proportional offset. Suppose the offset is 1.25% instead. At an extreme of 40,000 the level is 39,500 — identical. At an extreme of 41,200 the level is 41,200 less 515, or 40,685. Fifteen below the absolute version, and the gap widens with every new extreme.
The outlying print. Now suppose that at some point a small aggressive order prints 41,600 and nothing else trades near it. On a continuous last-referenced trail, the extreme becomes 41,600 and the level becomes 41,100 — above where the market was trading before and after the print. The next ordinary move down through 41,100 fires the order. The trail was moved by a single trade of a size that changed nothing else.
The failure mode
A trailing stop is a trigger, and it protects a price no more than a fixed stop does. What it adds is a level whose derivation is invisible: the extreme is held by the venue, it is usually not displayed, and it is the one input you cannot reconstruct from the chart after the fact.
Three specific ways that bites. The ratchet is asymmetric, so a market that makes a new extreme and then retraces has moved your trigger closer without any action from you — which is the mechanism functioning as designed and is routinely read afterwards as the level having been wrong. The extreme belongs to the reference price rather than to the chart, so a mark-referenced trail can ratchet on movement that never printed locally, and then fire on movement that did. And the child order is subject to the same walk as any aggressive order arriving during a move, so the fill is not the level, and the difference between them is not part of anything the trail controls.