What is a Trailing Stop? How to place a trailing stop order correctly

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2021-03-23 06:16:40

What is a Trailing Stop?

Trailing stop is an order type stop lossBut instead of being a fixed point, it moves in a direction as long as it is in the investor’s favor.

In addition to take profit and stop limit which are commonly used, the trailing stop order is also effective.

Tranling stop works like a regular stop loss. The difference is that it closes trading when there is a significant adverse price movement. However, it features the feature of being able to automatically move with the price when the price is moving in the direction of the trade.

What is a trailing stop

Meaning of Trailing Stop

As it moves in the direction of the trade, it will move up gradually on profitable buy orders. Or conversely, move lower with your sell orders profitable.

Depending on the trailing stop you use, it will not move when the price is moving in the opposite direction of your trade position.

Trailing stop it is like moving average (MA) will continuously self-adjust. It is also when the market moves in the opposite direction of your trade. Let’s first consider its benefits.

Benefits of Trailing Stop

Trailing stops can be of great benefit to a trader when it is used properly. It can be a useful risk management and trade management tool. It helps traders control losses and ensure profits. Here are some of the common benefits of using trailing stops.

Risk management

Like a stop loss, a trailing stop is used to prevent large losses when trading. A trader can place a trailing stop at the same time as a trade. So it can start protecting transactions from the very beginning.

In this case, the trailing stop starts from a negative profit. As the price moves in a direction in favor of the trade, it will approach the entry (breakeven level). So reduce the size of the potential loss if the price moves adversely.

In the image below, when you trade with a trailing stop order. If the stop has been attacked before the market moves up in the direction I want, then I will suffer a loss.

trailing stop risk management

Profit protection

Some traders only use a trailing stop when the price has moved smoothly and the trade has been profitable. Before that, they used this fixed order to limit the downside risk.

In the example below, when the position is profitable, I use the trailing stop to take profit and capture the next trend.

trailing stop protects profits

When to use Trailing Stop

Though it can help a trader lock in profits. Also makes managing transactions easy, but can sometimes not be helpful. The decision when to use the trailing stop depends on the trading experience, trading style and market situation.

As such, you should try to re-test your strategy to find out which way is most effective. However, there are some things that can be said when to use a trailing stop.

In the following example, we see early on some dangers that need to be addressed to get the best results.

when to use stop loss orders

A reasonable trailing stop setpoint

When using this command, it’s important to set it at an appropriate level. Means not to be too close, together not too far.

If the stop is too close to the current price, it won’t be enough room for the revolving asset price. Or the trade could be closed early before any move.

set a reasonable stop

It is best to find a suitable mid area. But getting the ideal distance is not always easy. Because market conditions are always changing.

However, it is possible to gauge the correct distance from historical price movements through backtesting. The goal is to place the stop at a distance from the current price where the expected will not be triggered unless the price has changed direction.

An example of an adjustment with an asset class of about $ 10 or less. Then trailing at more than 10 $ is necessary.

Real life example of trailing stop

Problem

You buy copper Binance coin (BNB) for $ 20. Check the price chart of BNB, you see it has a historical uptrend. Prices usually correct about 5-10% before continuing to rise again. You can decide to track the percentage of price movements.

To choose the right percentages for your stops compare. Since historically it corrected around 5-10%, if using a value below 10% it is too close and a normal correction could stop the price. Close the trade before the price expected the move to occur.

A good option is around 13 or 14%. This way your transaction has scope to move. In case the price changes direction, your trade will close without losing too much profit. Since the pre-correction is below 13% when the price falls more than 13%, the trend is probably changing.

Watch now: What is Binance exchange? User registration instructions from AZ [2020]

Result

With a trailing stop at 13%, it will be at $ 17.4 at the moment of entry. This is the case when you order it right away.

When the BNB price rises from $ 20 to $ 30, the trailing stop is at $ 26.1. When the price is at $ 40 the stop is at $ 34.8. And if the price starts to drop from $ 40 down then the trailing stop is still active at $ 34.8. When it falls below $ 34.8, your BNB will be sold.

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