What is Trailing Stop?
A trailing stop is a modification of a typical stop order that can be set at a defined percentage away from the market price. It can help traders limit losses and maximize profits when the market moves in the trader’s favor.
When the price moves in a favorable direction, the trailing stop move with it by a certain percentage. As long as the price moves in the trader's favor, it keeps the trade open and continue to profit. Once it moves to lock in a profit or reduce a loss, it does not move back in the other direction.
How are Trailing Stop executed?
Trailing Stop is only used to close existing positions
For a long position, the trigger price must be higher than the latest market price. When the latest market price reaches the trigger price, the trailing stop price increases by a certain percentage. That is, when the market price rises after the order is triggered, the Trailing Stop price also rises and a new Trailing Stop price is formed, but if the price falls, the trailing stop stays in place. If the latest transaction price falls from the highest price beyond the predetermined pullback range and reaches the latest Trailing Stop price, the position will be immediately entrusted executed as a market order, sold and closed at the market price.
Similarly, for a short position, the trigger price must be lower than the latest market price. When the latest market price reaches the trigger price, the trailing stop price falls by a specific percentage. That is, when the market price falls after the order is triggered, the trailing stop price also decreases and a new trailing stop price is formed, but if the price rises, the trailing stop stays in place. If the latest transaction price rises from the lowest price beyond the predetermined pullback range, and reaches the latest Trailing Stop price, the position will be immediately executed as a market order, bought and closed at the market price.
Trailing Stop trade must meet two conditions, that is, only when both the trigger price is reached and the preset pullback rate is reached, can the trailing stop order be executed as a market order and sent to the market for trading.
How to set Trailing Stop?
1. Trigger conditions:
The following two conditions must be met at the same time for the trailing stop transactions.
For closing of a long position:
The trigger price is reached by the market price
change rate ≥ pullback rate
For closing of a short position:
The trigger price is reached by the market price
change rate ≥ pullback rate
2. Pullback rate
The pullback rate determines the specific price at which the Trailing Stop price tracks the latest transaction price. The pullback ranged from 1% to 99%. Users can fill in and adjust pullback rate by themselves, or select quick options such as "5%, 10%", etc.
3. Trigger price
Users can set a trigger price for triggering the trailing stop order by themselves or select the latest market price to trigger directly.
When setting a trailing stop order for long position, the trigger price must be higher than the current latest market price. On the contrary, for short position, the trigger price must be lower than the current latest market price
The market highest/lowest price must meet or exceed the trigger price to satisfy the trigger condition.
4. Trigger order
Triggered by the market latest price
5. Market order
Long position trailing stop: when the market price rises and then falls, and the pullback rate is greater than or equal to the set pullback rate, the order will be executed as a market order at the latest market price.
Short position trailing stop: when the market price falls and then rises, and the pullback rate is greater than or equal to the set pullback rate, the order will be executed as a market order at the latest market price.
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Important Notes
It is very difficult to set the optimal pullback rate and trigger price.
For a Trailing stop to work as it should, the pullback rate should be neither too small nor too large; similarly, the trigger price should be neither too close nor too far from the current price. When the pullback rate is too small, or the trigger price is too close to the current price, the trailing stop is triggered by normal daily market movement, and thus the trade has no room to move in the trader's direction and make more profits. A stop loss that is too tight will usually result in a losing trade as the market price recovers.
However, a trailing stop that is too wide will not be triggered by normal market movements, but it does mean the trader is taking on the risk of unnecessarily large losses, or giving up more profit than they need to.
When the market fluctuates greatly, it is a better choice to increase the pullback rate, while a lower pullback rate is more suitable for stable market conditions.
There is no ideal pullback rate and trigger price. The trailing stop should be changing over time because markets are always changing. No.1 suggestion for investors is that please consider your own risk tolerance, investment experience, economic ability and other important factors before investing, so when determining the pullback rate and trigger price, in addition to the rational judgement of the price change, you should also carefully consider your own profit target and loss tolerance.
Why use Trailing stop:
- Purpose: It is impossible to confirm where the highest or lowest price is, and it is also impossible to ensure profit from closing the position at the highest/lowest point, so trailing stop is an effective tool to maximize profits as much as possible and lock in them.
- Limitations: Unable to be in market 24 hours a day.
- Other advantages: Compared with the regular take-profit and stop-loss, users do not need to frequently modify the set take-profit and stop-loss with the market change.
Example:
When a long position is closed in a favorable direction:
Position: 1BTC long position
Opening price: 30000
Latest market price 31000
It can be seen that according to the current market price, the estimated unrealized gross profit=(31000-30000)*1=1000U
Already known: According to the recent market, it is found that after each rise, there will be no more than 3% pullback. We make the following prediction: In the recent market, if the pullback is within 3%, it can be considered as a normal case, and the market will continue to rise; if the pullback exceeds a certain value (assuming that it is identified as 5%), it is considered that It's a bullish end (the price rise is over, and a crash is about to happen). The position needs to be closed before the market price crash.
Set Trailing Stop as follows:
Trigger price 32000
5% pullback rate
At this time, as long as the latest market price continues to rise to 32,000, the trailing price will start trailing, and in the continuous rise, when the system receives a 5% price pullback, the system will automatically close the position at the market price.
Assume that the market price has been rising after triggering 32000, reaching 35000
At this time, the trailing price has also tracked to 35000*(1-5%)=33250
However, after 35000, the prise stops to rise, and began to fall in the opposite direction. Since the trailing price never move back when the market moves in a non-favorable direction, the trailing price remains at 33250
If the market price falls from 35000 to 33300 and then starts to rise again, the trailing stop order will not be executed, because the pullback rate has not reached 5%
If the market price falls from 35000 to 33250 or below, the trailing order will be automatically closed at 33250
At last, the transaction price is 33250, which is a stop loss compared to the highest point of 35000, but it is profitable compared to the opening price of 30000.
Closing the position in time before predicting a sharp fall not only locks in profits, but also relatively maximizes profits when the direction is favorable.
When a short position is closed in a favorable direction:
Position: 1BTC short position
Opening price: 30000
Latest market price 29000
It can be seen that according to the current market price, the estimated unrealized gross profit=(30000-29000)*1=1000U
Already known: According to the recent market, it is found that after each fall, there will be no more than 3% pullback. We make the following prediction: In the recent market, if the pullback is within 3%, it can be considered as a normal case, and the market will continue to fall; if the pullback exceeds a certain value (assuming that it is identified as 5%), it is considered that It's a bearish end (the price fall is over, and a surge is about to happen). The position needs to be closed before the market price surge.
Set Trailing Stop as follows:
Trigger price 28000
5% pullback rate
At this time, as long as the latest market price continues to fall to 28,000, the trailing price will start trailing, and in the continuous fall, when the system receives a 5% price pullback, the system will automatically close the position at the market price.
Assume that the market price has been falling after triggering 28000, reaching 27000
At this time, the trailing price has also tracked to 27000*(1+5%)=28350
However, after 27000, the prise stops to fall, and began to rise in the opposite direction. Since the trailing price never move back when the market moves in a non-favorable direction, the trailing price remains at 28350
If the market price rises from 27000 to 28000 and then starts to fall again, the trailing stop order will not be executed, because the pullback rate has not reached 5%
If the market price rise from 27000 to 28350 or above, the trailing order will be automatically closed at 28350
At last, the transaction price is 28350, which is a stop loss compared to the lowest point of 27000, but it is profitable compared to the opening price of 30000.
Closing the position in time before predicting a sharp surge not only locks in profits, but also relatively maximizes profits when the direction is favorable.
When a long position is in loss:
Position: 1BTC long position
Opening price: 30000
Latest market price 25000
It can be seen that according to the current market price, the estimated unrealized gross loss=(30000-25000)*1=500U
The market is on rising again, but there is no guarantee that it will recover to a profit.
Set Trailing Stop as follows:
Trigger price 28000
5% pullback rate
At this time, as long as the latest market price rise to 28,000, the trailing price will start trailing, and in the continuous rise, when the system receives a 5% price pullback, the system will automatically close the position at the market price.
Assume that the market price has been rising after triggering 28000, reaching 28500
At this time, the trailing price has also tracked to 28500*(1-5%)=27075
However, after 28500, the prise stops to rise, and began to fall in the opposite direction. Since the trailing price never move back when the market moves in a non-favorable direction, the trailing price remains at 27075
If the market price falls from 28500 to 28000 and then starts to rise again, the trailing stop order will not be executed, because the pullback rate has not reached 5%
If the market price falls from 28500 to 27075 or below, the trailing order will be automatically closed at 27075
At last, the transaction price is 27075, which is a stop loss compared to the highest point of 30000, but it is profitable compared to the price of 25000 at the lowest.
When a short position is in loss:
Position: 1BTC short position
Opening price: 30000
Latest market price 35000
It can be seen that according to the current market price, the estimated unrealized gross loss=(35000-30000)*1=500U
The market is on falling again, but there is no guarantee that it will recover to a profit.
Set Trailing Stop as follows:
Trigger price 32000
5% pullback rate
At this time, as long as the latest market price continues to fall to 32,000, the trailing price will start trailing, and in the continuous fall, when the system receives a 5% price pullback, the system will automatically close the position at the market price.
Assume that the market price has been falling after triggering 32000, reaching 31000
At this time, the trailing price has also tracked to 31000*(1+5%)=32550
However, after 31000, the prise stops to fall, and began to rise in the opposite direction. Since the trailing price never move back when the market moves in a non-favorable direction, the trailing price remains at 32550
If the market price rises from 31000 to 31500 and then starts to fall again, the trailing stop order will not be executed, because the pullback rate has not reached 5%
If the market price rise from 31000 to 32550 or above, the trailing order will be automatically closed at 32550
At last, the transaction price is 32550, which is a stop loss compared to the lowest point of 30000, but it is profitable compared to the price of 35000 at the highest.
Latest price is trigger price:
Position: 1BTC long position
Opening price: 30000
Latest market price 31000
Set the trigger price in consistent with the latest price
5% pullback rate
When the trigger order is placed, the order is triggered at the latest market price of 31000
If the market price continues to rise form 31000 to 35000, the trailing price has also tracked to 35000*(1-5%)=33250
However, after 35000, the prise stops to rise, and began to fall in the opposite direction. Since the trailing price never move back when the market moves in a non-favorable direction, the trailing price remains at 33250
If the market price falls from 35000 to 34000 and then starts to rise again, the trailing stop order will not be executed, because the pullback rate has not reached 5%
If the market price falls from 35000 to 33250 or below, the trailing order will be automatically closed at 33250
At last, the transaction price is 33250, which is a stop loss compared to the highest point of 35000, but it is profitable compared to the opening price of 30000.
Trailing stop and regular stop at the same time:
Position: 1BTC long position
Opening price: 30000
Latest market price 30050
Triggered by the latest price
5% pullback rate
Regular stop price: 28500
If the market price rise to 30060, the trailing price has also tracked to 30060*(1-5%)=28557
And if the market price falls from 30060 to 28500, the trailing stop order will be executed at 28557, and the regular stop set will be canceled automatically
Position: 1BTC long position
Opening price: 30000
Latest market price 30050
Triggered by the latest price
5% pullback rate
Regular stop price: 29000
If the market price rise to 30060, the trailing price has also tracked to 30060*(1-5%)=28557
And if the market price falls from 30060 to 29000, the regular stop order will be executed at 29000, and the trailing stop set will be canceled automatically
Term Explanation:
Pullback: Financial term, every time the price goes up/down, the price pulls back/recovers slightly, adjusts and goes up/down again.
Pullback rate: The ratio of the difference between the highest/lowest price and the current price of the target
Closing long--price change from the highest point (highest-current)/highest
Closing short-- price change from the lowest point (current-lowest)/lowest