A trailing stop loss is a sell or buy order whose trigger threshold is not a fixed price but a gap, expressed as a percentage or a dollar amount, relative to the security’s current price. According to a bulletin from the US Securities and Exchange Commission published on Investor.gov, this threshold adjusts automatically as the price moves in a favorable direction, then locks in place once the price moves in an unfavorable direction. This mechanism applies to stocks traded through regulated US brokers; it does not document CFDs, Forex, or prop trading platforms.
The principle: a threshold that tracks the market, then locks
In its official definition, the SEC states that a trailing stop loss has no specific trigger price. The threshold is defined as a percentage or a dollar amount, above or below the security’s current market price. As long as the price moves in a direction favorable to the position, this threshold moves along with it, at the distance set by the investor. As soon as the price moves in the opposite direction, the threshold stops moving: it stays locked at its last value, and the order triggers if the price reaches it.
FINRA describes the same mechanism from the perspective of a broker’s client: the investor indicates a wish to sell if the stock falls by a given percentage or dollar amount relative to its market price at the moment that distance is set. The point of this device is to protect some of the gains already made without fixing a final exit price in advance.
The numerical example from the US regulator
The SEC bulletin offers a step-by-step example to illustrate how this works. An investor buys shares of stock XYZ at $20. The price rises to $22, and the investor places a sell order with a trailing threshold set $1 below the market. As long as the price keeps rising, this threshold follows at a $1 distance. The price reaches a peak of $24, which brings the threshold to $23, then starts to fall: the threshold then stays locked at $23. The shares are sold once the price reaches that $23 level, but the SEC explicitly notes that the actual execution price may deviate from that $23 threshold.
| Step | Stock price | Trailing threshold ($1 below market) |
|---|---|---|
| Initial purchase | $20 | not applicable |
| Price rises | $22 | $21 |
| Peak reached | $24 | $23 |
| Pullback and trigger | $23 | $23, locked |
Why the execution price is never guaranteed
One point the SEC bulletin highlights directly: the threshold is not a guaranteed execution price, but simply a trigger that turns the stop order into a market order. Once this threshold is reached, the order becomes a regular market order, executed at the best price available at that moment, which can differ significantly from the threshold if liquidity is lacking at that exact instant. To better understand this execution mechanics, the article on the market order and limit order explains why no execution price is ever guaranteed in advance.
The SEC adds a technical detail rarely mentioned: not all trading venues use the same criterion to determine that the threshold has been reached. Some exchanges rely solely on the last traded price, while others use the quoted bid and ask prices. This difference can slightly advance or delay the trigger of the same order depending on the platform used.
What these sources do not document
The cited SEC and FINRA bulletins concern US stocks traded through regulated US brokers. They do not address CFD contracts, the foreign exchange market, or trading platforms for funded accounts such as those offered by WeGetFunded. The general principle of a threshold that tracks price may exist on other instruments, but its trigger and execution rules there are set by each broker or platform, not by a US stock market regulator. Generalizing the mechanism described here to another market without verification would amount to attributing to that market a guarantee no official source documents for it.
Frequently asked questions
Does a trailing stop loss guarantee an exact sale price?
No. The threshold only triggers the conversion of the order into a market order. The actual execution price depends on the liquidity available at that exact moment and can differ from the threshold, as the SEC notes in its bulletin.
What happens if the price moves in my favor and then reverses?
As long as the price moves favorably, the threshold tracks the market at the set distance. As soon as the price reverses, the threshold stops moving and stays locked at its last value, ready to trigger the order if that level is reached.
Is the threshold the same on every exchange?
Not necessarily. The SEC states that some trading venues use only the last traded price to determine that a threshold has been reached, while others rely on the quoted bid and ask prices.
Does this mechanism apply to CFDs or Forex?
The SEC and FINRA sources cited here describe the US stock market overseen by regulated brokers. They do not document how CFDs or Forex work, where execution rules depend on each platform.