Trailing Measures: Uses and Related Terms

What Is Trailing?

Trailing refers to the property of a measurement, indicator, or data series that reflects a past event or observation. It is usually attached to a specified time interval by which the data trail or over which that data are aggregated, summed, or averaged. Trailing data and indicators are used to reveal underlying trends, but can delay recognition of trend turning points. Trailing can also refer to a type of stop order used by traders.

Understanding Trailing

Trailing data or indicators are useful to smooth out day-to-day noise and random variation in a data series. This can help reveal underlying, longer-term trends to support better financial, investment, or business decision making. However, because trailing data or indicators are always necessarily backward-looking they will not react immediately in turning points and shifts in the trend and will always be behind the curve of up-to-date, current data.

Trailing data or indicators can be used to guide decisions based on the relationship between current data and the underlying trend reflected in the trailing indicator. For example, if a stock price crosses above its trailing 3-month average, this might be taken as a sign that a rising trend has developed and it is time to buy.

The number attached refers to the most recently completed time period of specified length, such as 3-year or 12-month. It is most commonly used as "trailing 3-year”, "trailing 12 months," "trailing three months", or "trailing six months”.

Trailing is often attached to a return, ratio, or risk measure to describe the time that a particular set of data is referring to. Often, the trailing 3-year standard deviation will be used as a measure of risk for an investment fund. The trailing 3-year alpha can be used to show how well an investment manager has outperformed their benchmark. 

Types of Trailing

Fundamental Stock Analysis

Fundamental stock analysis can also often use trailing characteristics in their modeling processes, such as trailing free cash flow, trailing dividend yield, or trailing price-to-earnings (P/E), price-to-sales (P/S), and price-to-book (P/B) ratios. For example, the earnings in a trailing price-to-earnings ratio refers to the past earnings per share over a certain period—usually 12 months. Trailing 12 months is denoted by the acronym "TTM."

Financial Metrics

Trailing can also be to describe more concrete business statistics outside of financial metrics, such as same-store sales, total unit volume of sales over time, production levels and output, production efficiency or cost metrics, or other data relevant to a business’s operation or production process. These can be used to help business managers make better operational or strategic decisions, or by investors to obtain deeper insight into a company. 

Trading Technique

Trailing can also be used to describe a technique, such as a trailing stop order, in which a buy or sell order is linked to a specified relationship between a current price and a limit price set a specified amount or percentage above or below the price. For example, as a price is rising, a trailing stop set 10% below will also rise with the trend. Trailing stops move in one direction only, so if the current price starts to fall, the trailing stop stays 10% below the peak price and is triggered if the current price falls by 10% below its peak. Trailing stops can also be used for sell orders, with the stop set above the current price.