What Is a Trailing Stoploss?

What Is a Trailing Stoploss?

Trailing stop orders offer an excellent way to exit a trade when profits are realized. Rather than manually monitoring the market and setting profit-taking levels, traders can automate the process with trailing stops. This article will explain the main concept of trailing stoploss, how it works, its benefits and drawbacks.

Understanding Trailing Stop Orders

A trailing stop order, often called a trailing stop-loss, is like a smart tool for traders. It automatically tweaks the stop-loss level as the price of an asset moves. This tool is a key player in risk management. It helps traders grab profits when prices are rising and limits losses when they’re on a downward slide. What makes it cool is that, unlike regular stop orders with fixed prices, trailing stops move with the market price. It’s like having a dynamic and flexible sidekick in managing risks.

Trailing Stops in Long Positions and Short Positions

When you’ve got bitcoin and you’re in it for the long haul, using a trailing stop can be a smart move. Here’s how it works: let’s say you own $500 BTC, and now they’re rocking a market price of $600. You decide to play it safe and set a trailing stop at $20 below the current market price. This means as the bitcoin price goes up, the trailing stop keeps pace, always staying $20 behind the market price to protect your gains.

Conversely, when dealing with an open short position, the trailing stop is set at a fixed distance above the market price. For example, if an investor has sold $500 bitcoin and the current market price drops to $400, setting a trailing stop $20 above the market price would mean placing it at $420. As the market price continues to decline, the trailing stop adjusts accordingly, maintaining a $20 differential.

How Initiate a Trailing Stop Order

To initiate a trailing stop order on a crypto trading platform such as LBank, traders need to navigate to the order screen.The key components to configure are the trigger price and the callback rate.

1. Trigger Price: This is the price at which the trailing stop order is activated. Until the trigger price is reached, the order remains inactive. It’s the level at which traders decide to either take profits or limit losses.
2. Callback Rate: Also known as variance or Delta, this represents the percentage or dollar amount below the trigger price at which the trailing stop will trail the asset. It determines how closely the stop order follows the price movement.

How to implement Trailing Stop Orders

The process of implementing a trailing stop order may vary slightly depending on the trading platform. However, the general steps are as follows:

1. Identify the Trading Pair: Select the cryptocurrency pair you want to trade and navigate to the order screen.
2. Choose Trailing Stop: On most platforms, you’ll find the option for a trailing stop order. It might be labeled differently, but the functionality remains the same.
3. Set Trigger Price: Specify the trigger price at which the trailing stop order should be activated. This could be the current market price or a predefined level.
4. Determine Callback Rate: Choose the callback rate, either in percentage terms or as a specific dollar amount. This determines how far below the trigger price the trailing stop will be.
5. Choose Quantity: Indicate the quantity of the cryptocurrency you want to trade. This should align with your existing position size.
6. Activate the Order: Confirm and activate the trailing stop order. Depending on the platform, you may also have the option to set an activation price, which determines when the order becomes active.

Benefits of Using Trailing Stops

Trailing stops offer a range of advantages to traders, making them a valuable tool for risk management and profit optimization. The threefold benefits of trailing stops include:

1. Securing Profits: The primary purpose of a trailing stop is to lock in profits as a position moves favorably. By dynamically adjusting the stop price with market movements, traders can capture gains without the need for constant manual intervention. This feature is especially valuable during trending markets, allowing investors to ride the momentum while safeguarding accumulated profits.
2. No Limit on Potential Profits: Unlike fixed stop orders that can limit potential profits by prematurely closing a position, trailing stops adapt to market conditions. As the market price rises in the direction of order, the trailing stop increases accordingly, allowing traders to capitalize on extended trends and maximize profit potential without prematurely exiting winning positions.
3. Setting Limits on Potential Losses: While securing profits, trailing stops simultaneously establish a limit on potential losses. By defining a fixed distance for the trailing stop, traders ensure that they exit a position if the market turns against them beyond a specified point. This risk management aspect is crucial for protecting capital and preventing significant losses, providing traders with a disciplined approach to their investment strategies.

Drawbacks of Trailing Stop Orders

1. Whipsawing in Volatile Markets: there are some crypto markets, sometimes often exhibit a heightened search for liquidity. Traders placing trailing stops just below swing lows may find themselves victim to whipsaw movements. These instances involve the market temporarily reversing to trigger stops before swiftly moving back in the original direction. In such scenarios, traders utilizing trailing stops may face premature exits and miss out on potential profits.
2. Stop Runs and Market Manipulation: In market conditions where stop runs become more prevalent, traders placing trailing stops under swing lows can inadvertently fall prey to market manipulators triggering stops to create liquidity. This results in stop-run-induced volatility, where the market briefly dips to trigger stops before quickly recovering, leaving trailing stop users at a disadvantage.
3. Ineffective in Trend Reversals: Trailing stops are sometimes less effective during trend reversals. In a bear market, for example, a trader initiating a short position and employing a trailing stop above a recent high might get stopped out during a temporary uptick before the market resumes its downward trajectory. This failure to adapt to changing market conditions poses a significant drawback.

Wrapping Up

Mastering how to use trailing stop orders increases your chances of making more-informed trading decisions. Whether you’re a seasoned trader or just starting out, adding trailing stops to your risk management plan can really step up your overall trading game. Understanding how trailing stops work gives you the confidence and control to navigate the sometimes wild world of crypto markets.

It’s important to remember that everyone has their own risk tolerance and trading style, so tailoring your approach to trailing stops to fit your preferences is key. When you get it right, trailing stops become a powerful ally, helping you consistently make profits in the thrilling realm of crypto trading.

Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.