Trailing

Reviewed by Sweta | Updated on Aug 26, 2020

Introduction

The term 'trailing' is used along with time period while making a comparison of a set of data in a current period with an earlier period. The data set would be the recently completed time period.

Understanding Trailing

Trailing is often attached to a return percentage, a ratio or a measure of risk to describe the period that a particular set of data is referring to.

Factors to consider before you invest

  1. The period can be of a specified length such as a quarter, six months, one year or five years.

  2. Trailing is used to measure the growth or increase or decline or losses based on past statistics.

  3. The description would generally read as trailing three months, trailing six months, trailing one year and so on.

  4. Trailing is also used as a measure of risk, especially in investments. The trailing three-year standard deviation is generally used as a measure of risk for an investment fund. The trailing three-year alpha can be used to show how well an investment manager has outperformed their benchmark. Alpha is a measure of investment's performance on a risk-adjusted basis.

  5. An analyst can also use trailing characteristics in their models for fundamental stock analysis, 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 refer to the past earnings per share over a certain period, normally 12 months. Trailing twelve months is denoted by the acronym TTM.

  6. Trailing can also be used to describe a technique such as a trailing stop order. Trailing stop means a stop order that can be set, at a defined percentage or amount in dollars, away from a security's current market price. For a long position, a trailing stop loss can be placed below the current market price. For a short position, the trailing stop would be placed above the current market price.