What is a trailing stop? This is a tool for risk management and profit optimization in stock trading, foreign exchange, and other types of financial investments. This helps investors lock in profits and minimize the risk of loss in case the market turns. This article, Learn Crypto Trading will help you learn about this order concept. Including the pros and cons of the order and how it works in a cryptocurrency exchange.

Introduction to Trailing stop in cryptocurrency exchange

The concept and working of What is a trailing stop  will be explained in the following sections:

What is a trailing stop?

A trailing stop order is a conditional order that uses a trailing amount set outside the current market price, rather than a fixed stop-loss price, to trigger a market order. It is an advanced variation of a regular stop-loss order, adjusting dynamically according to the market price. When placing a trailing stop order, you choose a percentage or amount lower than the current market price for a long position or higher for a short position. If the price moves in your favor, the stop loss order moves accordingly, maintaining the set distance. When the price reaches the trailing stop, the order is triggered and closes the position.

Trailing stops offer flexibility and the potential to secure higher profits in trending markets. When the market moves in your favor, trailing stops protect you, allowing you to capture large price swings. It automates your exit strategy, eliminating the need to manually adjust your stop loss.

What is the difference between a stop loss and What is a trailing stop?

Although both orders are intended to cut losses when the market reverses, stop loss and trailing stop orders have different functions:

The trailing stop is to secure potential profits when the market moves in the investor’s favor. Stop loss is only to limit losses when the market moves against the prediction. Stop loss is a fixed order at a pre-set level, while trailing stop changes flexibly according to price trends and stops when the price reverses. The trailing stop level cannot be less than the stop loss level.

See more: What is Margin? Optimize profits with Margin

Advantages and disadvantages of What is a trailing stop?

Like every trading tool, a trailing stop-loss order has its pros and cons. Here are some points to note to help you understand the pros and cons of What is a trailing stop :

Advantage:

• Profit Protection: Automatically adjust stop loss when the market is favorable, helping to lock in profits and minimize risks.
• Flexibility: Flexible trade management, participate in the uptrend, and limit losses when the price reverses.
• Risk Management: Limit losses if the market turns, protect capital, and maintain trading discipline.
• Reduce Emotional Bias: Eliminate emotional decisions by automating exit strategies, and supporting disciplined trading.
• Using a trailing stop helps protect profits made from trades. From there, maintain and improve the gross profit margin of the business or investor. Therefore, it is necessary to know the Trailing stop order to help improve and know its benefits with What is gross margin.

Defect:

• Market Noise Impact: Stops are very sensitive to short-term volatility, which can lead to premature exits and missing further volatility.
• Limited Protection During Gaps: No significant protection during market gaps or extreme price fluctuations, which can cause larger losses or missed opportunities.
• Set Trailing Amount: Pricing that is too broad or too narrow can introduce unnecessary risk.

  

How What is a trailing stop works

Specifically, how the trailing stop works is as follows:

How Trailing stop crypto works in detail

You can place a Trailing Stop order when entering a position, but this is not common. Usually, traders use Trailing Stop to manage risk and protect profits after opening a position.

When trading Long, place a Trailing Stop sell order above the current market price. The Trailing Stop price increases by percentage or amount as the market increases. If the price falls below the Trailing Stop, a sell order will trigger and close the trade.

If you already have a Long position, place a Trailing Stop sell below the current market price. As the price starts to rise, the Trailing Stop will increase accordingly. If the price falls below the Trailing Stop, the Sell order will be triggered and the trade will be closed.

For Short trades, place a Trailing Stop Buy order below the current market price. The Trailing Stop price decreases by a percentage or amount as the market declines. As the price increases, the Trailing Stop stops adjusting. If the price increases beyond the stop-loss rate, the Buy order is triggered and the trade is closed.

To trigger a Trailing Stop order as a market order, both the trigger price and the return rate must be met.

How to place an order What is a trailing stop

The Trailing Stop order only activates when both conditions are met:

• Conditions for placing a Trailing Stop buy order:

Activation Price ≥ Lowest Price

Rebound rate ≥ Payback rate

• Conditions for placing a Trailing Stop sell order:

Activation price ≤ Highest price

Rebound rate ≥ Payback rate

In there:

1. Callback rate: The percentage of opposite price movements you accept, from 0.1% to 10%, manually filled in the “Return rate” field.

2. Trigger price: Price to activate the Trailing Stop order. If not set, the trigger price defaults to the market price (“Last price” or “Mark price”).

For a buy Trailing Stop order, the trigger price must be lower than the current market price. Whereas, a sell Trailing Stop order must be higher than the market price.

3. Activation conditions:

• Use the Last Price tick to activate.
• Use Mark Price to trigger liquidation and calculate unrealized profit or loss. When prices fluctuate widely, the Last Price and Mark Price may differ. You can change the trigger condition by canceling or replacing the order.

  

When should you use a Trailing stop appropriately?

There are times when a Trailing Stop order is useful and other times it is not. Here are some situations when Trailing Stops are especially beneficial:

• Riding Trends: Trailing Stop is ideal for taking advantage of strong trends. When the market is in a prolonged uptrend or downtrend, Trailing Stop allows you to stay in the trade and protect profits.
• Volatility Management: In volatile markets, Trailing Stop helps manage risk by adjusting flexibly to market prices, creating a buffer against sudden price reversals.
• Protect Large Profits: Once a significant profit has been made, Trailing Stop protects that profit. When the market turns in your favor, prices stop rising. Make sure you exit the trade with a significant profit if the price reverses.
• Automated Exit Strategy: Trailing Stop eliminates the need to manually monitor and adjust stop loss levels, useful for traders who are busy or prefer a hands-off approach.
• Trailing Stops are often effective when holding trades for multiple days or longer. In short-term and intraday trading, Trailing Stops are less effective due to small trends, making fixed-take profit and stop loss levels more effective.

See more: Open Bybit account: Explore the world of Crypto

Effective investment method What is a trailing stop

We offer some effective investment methods for investors as follows:

• Trailing stop at acceptable risk level:

Investors determine the risk level (R) and set trailing stops such as 1R, 2R, …, no.

Highly volatile market: set a trailing stop of 2R or more.

Low volatility market: set trailing stop at breakeven 1R.

• PSAR Trailing stop:

Use PSAR to set a trailing stop order when the candlestick chart nearly touches the Parabolic SAR dot, and take profit at the nearest PSAR level.

• Trailing stop at level X – candle:

Use the highest and lowest price of the previous candle.

For example: Analyze 3 candles, place a sell order at the highest point and a buy order at the lowest point of those 3 candles.

• Use trailing-stop at support–resistance level:

Use support and resistance lines to determine tops and bottoms in a trend.

If unsure of top/bottom, place Trailing Stop order at support or resistance level.

• At the moving average position, you should use the Trailing stop:

Use moving averages (MA) like MA20 and SMA20 to set trailing stops.

Depending on your short- or long-term trading purposes, adjust the period of the moving average.

Trailing stop and cryptocurrency exchange

Trailing Stop is a useful tool to help crypto investors manage risk and optimize profits.

Trailing stop trong crypto marketplace

• Most reputable cryptocurrency exchanges today support Trailing Stop orders. Helps investors easily manage risks and optimize profits when trading crypto.
• Some popular exchanges that support Trailing Stop are Binance, FTX, Huobi, OKX,…

A strategy combining Trailing stop with Crypto technical indicators

Combining Trailing Stop with technical indicators such as RSI, MACD, Bollinger Bands,… can help investors determine entry and exit points more effectively, thereby increasing the chance of success.

For example: Use RSI to determine buying points when the price is in an oversold zone and combine Trailing Stop to automatically take profit when RSI increases.

Notes on using the Trailing stop in crypto investment for beginners

Some notes in crypto investment that you need to keep in mind even if you have been a long-time investor:

1. Understand how Trailing Stop works and the factors that affect its effectiveness.
2. Start with a small percentage difference and adjust as you gain experience.
3. Combine Trailing Stop with technical indicators and market analysis to make informed trading decisions.
4. Always follow capital management principles and never invest more money than you can afford.
5. Use Trailing Stop as a trading aid, do not rely solely on it.
6. Combine Trailing stop and take profit flexibly together. Both are risk management tools in financial trading. Take profit is a pre-set profit target for the trade to automatically close the position when the desired profit level is achieved. You need to carefully study What is take profit to know how to combine the two methods.

   

Conclude

In short, understanding what is a trailing stop and how to use this tool effectively is an important factor to help investors protect profits. More importantly, minimize risks in the financial market through trailing stops. Apply trailing stops to manage risks intelligently and optimize your trading strategy. Learn Crypto Trading also shares with investors effective investment strategies and methods in other articles. Learn the knowledge in cryptocurrency exchanges right now so you don’t miss out!

FAQS

How can a Trailing Stop order help reduce risk?

The Trailing Stop order helps minimize risk by automatically adjusting the stop loss level according to the market price. Helps protect profits when markets move in their favor. This helps you exit the trade with a lower loss in case the market turns against you.

What is the difference between a Stop Loss order and a trailing stop?

A stop-loss order is a fixed stop-loss order that does not change even if the market price moves. Meanwhile, the Trailing Stop order automatically adjusts to the market price, helping to protect profits when the price moves in favor and trigger a sell order when the price moves against it.

How to optimize Trailing Stop orders?

To optimize your Trailing Stop order, you need to determine your acceptable level of risk and the appropriate distance for your Trailing Stop order. This helps you balance between protecting profits and avoiding the order being triggered too early due to short-term market fluctuations.