How to Use Trailing Stops in 2026: A Practical Guide for Australian Investors

A trailing stop is a type of stop-loss order that automatically adjusts as the price of your investment moves in your favour. Unlike a traditional stop-loss, which stays at a fixed price, a trailing stop “trails” the current market price by a set amount or percentage. If the price rises, the stop moves up with it. If the price falls, the stop stays put. If the price drops to the stop level, your shares are sold, helping you lock in profits or limit losses.

Example:

• You buy shares at $20 each and set a trailing stop at $1 below the current price. If the share price rises to $22, your stop moves up to $21. If the price then falls to $21, your shares are sold, securing a $1 per share gain.

Trailing stops can be set as a dollar amount or a percentage. Many Australian trading platforms now offer trailing stop orders for shares and exchange-traded funds (ETFs), making them accessible to a wide range of investors.

Several trends are making trailing stops especially relevant for Australian investors this year:

• Market Volatility: The Australian share market has seen larger swings, influenced by global economic changes and rapid shifts in technology sectors. Trailing stops can help you benefit from upward moves while providing a safety net if prices turn quickly.

• Automated Trading: More investors are using digital platforms and automated tools. Trailing stops allow you to automate your exit strategy, helping you avoid emotional decision-making and react faster to market changes.

• Changing Tax and Reporting Rules: With ongoing updates to tax reporting and capital gains requirements, using trailing stops can help you manage when you realise gains or losses, although you should always consider your personal tax situation.

Australian brokers have responded to these trends by offering more flexible trailing stop features, including customisable thresholds and real-time execution options.

Trailing stops can be useful for both short-term traders and long-term investors. Here’s how to use them effectively:

1. Choose the Right Trailing Distance

The distance you set for your trailing stop is crucial. If it’s too tight, normal price fluctuations might trigger a sale too early. If it’s too wide, you could give back more profit than you’d like.

• For stable, blue-chip shares, investors often use a smaller percentage or dollar amount.
• For more volatile stocks, a wider trailing stop may be appropriate to avoid being stopped out by routine swings.

There’s no one-size-fits-all answer. Consider your investment goals, the volatility of the asset, and your risk tolerance.

2. Regularly Review and Adjust

Market conditions and your own goals can change. Review your trailing stops periodically and adjust them if needed. Some trading platforms now offer features that let you automate adjustments based on market volatility or other indicators.

3. Understand Order Types

Trailing stops can be set as either “market” or “limit” orders:

• Market Trailing Stop: Sells your shares at the next available price once the stop is triggered. This is fast but may result in a sale at a lower price during sharp market moves.
• Limit Trailing Stop: Sells only at your stop price or better. This gives you more control but may not execute if the price falls quickly past your stop.

Check your broker’s platform to see which types of trailing stops are available and how they work in practice.

4. Don’t Rely on Trailing Stops Alone

While trailing stops can automate part of your exit strategy, they don’t replace regular portfolio reviews. In fast-moving or illiquid markets, prices can gap down, meaning your shares might sell at a lower price than your stop. It’s important to stay informed and review your investments regularly.

Trailing stops aren’t just for day traders. Here’s how different investors might use them:

• Active Traders: Use trailing stops to lock in gains on short-term trades and manage risk during volatile sessions.
• Long-Term Investors: Set wider trailing stops to protect profits on stocks that have risen significantly, or to manage risk during uncertain periods.
• ETF Investors: Many platforms now allow trailing stops on ETFs, providing a way to protect diversified portfolios as well as individual shares.

As more platforms offer trailing stops, it’s important to understand the details:

• Platform Differences: Brokers may handle trailing stops differently, especially during periods of high volatility or low liquidity. Some offer mobile notifications and dynamic options linked to real-time data.
• Order Execution: In fast markets, your stop order may be filled at a price lower than your stop level, especially with market orders. Limit orders offer more control but may not always execute.
• Regulatory Changes: Brokers are required to be transparent about how stop orders are handled, especially during market gaps. Make sure you understand your broker’s policies and disclosures.

• Start with small positions to get comfortable with how trailing stops work on your platform.
• Review your trailing stops regularly, especially after significant market moves or changes in your investment goals.
• Combine trailing stops with other risk management strategies, such as diversification and regular portfolio reviews.
• If you’re unsure, consider seeking professional advice to ensure your approach fits your overall financial plan.

What’s the main benefit of using a trailing stop order?

A trailing stop helps you lock in profits as the price rises, while still providing downside protection if the market turns.

Can I use trailing stops on ETFs and managed funds?

Many Australian brokers now offer trailing stops on ETFs. Availability for managed funds varies, so check with your platform.

Will my shares always sell at my stop price?

Not always. In fast-moving or illiquid markets, your shares may sell at the next available price, which could be lower than your stop level.

How often should I review my trailing stops?

It’s a good idea to review them regularly, especially after major market moves or changes in your investment strategy.