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If you’re looking for a way to protect your profits and manage your risk when trading stocks, a trailing stop order might be just what you need. By setting a stop loss level that automatically adjusts as the stock price moves, you can minimize your losses and lock in profits while also allowing for further upside potential. In this article, we’ll take a closer look at how trailing stop orders work and provide some real-world examples of how to use them effectively in your trading strategy.

Trailing stop orders are a type of trade order that is used in financial markets such as stocks, forex, and cryptocurrencies. This type of order is used to help traders lock in profits and limit their potential losses.

A trailing stop order is an order that automatically adjusts the stop loss level as the price of the asset moves in the trader’s favour. The stop loss level is the price at which the trader’s position will be automatically closed out if the market moves against them. It can be placed in both directions (buy or sell).

The trailing stop order works by setting a trailing stop distance, which is the number of points or percentage distance from the current market price. The stop loss level is then adjusted as the market price moves in the trader’s favour, but never in the opposite direction. This allows the trader to lock in profits as the market moves in their favour while also limiting their potential losses. If it’s a sell order, the stop loss price will move up as the token price goes up. Then, when the market takes a dip, the stop loss will not move down, so the order will get executed if the price of the token reaches that of the stop loss. So, if you placed a stop loss of 8% let’s say, then your sell order will get executed when the market drops by 8% or more from the highest price that was recorded while your order was active.   

It’s important to choose the right trailing stop loss for your trades. A stop loss that’s too tight, such as 3% or 5%, may result in the trade being stopped out before the price has a chance to move higher due to minor pullbacks that tend to move more than this. On the other hand, a 20% trailing stop is excessive and may not be suitable based on recent trends. You have to take into account the regular market moves. If the average pullback of the pair you’re trading is about 4-5%, with bigger ones near 8%, then you don’t want to place a stop loss less than that. A 3-4% stop loss would mean that the typical market volatility can easily eat your stop loss quickly and you’re out of the trade. Maybe even at a small loss. What I mean, is that if you’re trading longer term and chasing bigger market moves, a better option would be a trailing stop loss of 10% to 12%, which provides enough room for the trade to move while getting the trader out quickly if the price drops by more than 12%. This is larger than a typical pullback, which could indicate a trend reversal instead of just a pullback. Ideally, this is what your goal is. You want to prevent losses from a trend reversal, not just a minor pullback. Unless you’re trading short term: small moves. In that case, a 3-4% stop loss can save you from a bigger move of say – 5% or 7% – this would work fine for a short term swing trade, but you’ll have to be proactive and make sure you monitor that pair closely, so you can jump in soon after, before you miss another rally.

Let’s see an example.

Let’s say you bought ETH at $1000 and set a trailing stop order with a trailing stop distance of 10%. This means that your stop loss level will be adjusted to 10% below the highest price the token reaches after you buy it.
Your stop-loss being 10% is originally sitting at $900. If the price moves up to $1100, your stop loss level will be adjusted to $990 ($1100 – 10%). If the price continues to rise and reaches $1200, your stop loss level will be adjusted to $1080 ($1200 – 10%). If the price then drops to $1080 or below, your position will be executed at the stop loss level of $1080, limiting your potential losses to 10% and locking-in a small profit of $80.

On the other hand, if the token price continues to rise and reaches $1300, your stop loss level will be adjusted to $1170 ($1300 – 10%). If the price then drops to $1170 or below, your position will be automatically executed at the stop loss level of $1170, locking in a profit of $170 per token.

With a tighter stop-loss it will look like this:

You bought ETH below $1000 and set up a stop loss at $1000 at 4%, your stop loss level would be originally set at $960 ($1000 – 4%). If the price drops to $960 or below, your position will be automatically closed out at the stop loss level, limiting your potential losses to 4%. Let’s say the price actually rises to $1100, your stop loss has moved up too and it’s now set at $1056 (4% below $1100). Then the price falls back to $1050. Your order is triggered by this drop and ideally you sell at $1056, locking in a small profit of $56 but avoiding bigger loss. If the price doesn’t fall, but goes higher, reaches $1200, your stop loss will have adjusted upwards to $1152 ($1200 – 4%). A subsequent drop to that price level will trigger your order and you can lock in a profit of around $150 depending on how fast your order can be executed. If it’s indeed in Ether, there’s a lot of liquidity, high trading volumes, so you’re okay. Some altcoins have very low liquidity, so you have to be careful with those.  

And also, if the token price continued to rise, the trailing stop loss level would also continue to trail the price, moving upwards as the token price continued to climb. This would allow you to continue to participate in any further upside potential while also providing downside protection in case the stock price were to suddenly reverse and decline. But if a 4% or 5% stop is the typical market volatility, then you can be out of this trade too soon. 

This is why you need to test this out a few times before you can use it more confidently. Make sure you research the market well, so you know what to expect. What are the most likely moves, the most likely scenario. I’m not saying you have to know exactly what will happen – this is not possible. But we use technical analysis to be able to tell what is likely to happen, usually there are at least two or three scenarios that can play out and being able to read the charts and anticipate certain moves, will be essential for making this work best for you.

Disclaimer: Trailing stop orders can be a useful tool for traders who want to take advantage of market movements while limiting their potential losses. However, it’s important to note that trailing stop orders do not guarantee profits or prevent losses in all market conditions, and traders should always have a risk management strategy in place.

☝These are my opinions, not financial advice, always DYOR.

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