Sirwin
Sirwin

Trading 101 - Order Types: Trailing Stop Order (TSO)

By TradingBull | TradingBull_articles | 19 Jan 2021


bec7544b4978a6ac1959749a611e12b249e73cb3b89c335e1c98d48a98ea4df2.jpeg

A trailing stop order is used to secure profits and limit losses as the market conditions move favorably for the trader. As the market price changes, the stop-loss order value is adjusted to remain either at a % of the current market value or at a fixed distance from the current value. Once the trigger is met, the stop order is transformed into an open market order.

Pros: Long-term holders can dynamically secure a long-term position without need for day trading. Trailing stop order is not visible on the order book (able to be seen by other traders) until triggered.

Cons: Establishing the ideal distance between current market price and trigger point can be difficult.

Example:

You just bought ABC at $10,000 and plan to hold (hodl) it for a long period because you believe in a long term bullish market. However, you are not staying in front of the computer 24 hours a day and still want to prevent a fast market correction from erasing your profits.

1- Set distance %: You set a trailing stop value at 10% (0.1). At the opening of the order, your stop-loss trailing order will then be fixed at $9,000 (=$10,000 - $10,000 x 0.1). As the price of ABC goes up to $12,000, your 10% trailing stop follows and is now fixed at $10,800 (=$12,000 -$12,000 x 0.1). Suddenly, a correction occurs and the price of ABC fall back to the $10,000 mark. When the market price reach $10,800, your trailing stop order will automatically open into a market order and your position will close at around $10,800 (ABC sold). You have consequently secured $800 profit on the trade.

2- Set distance value: You set a trailing stop value at $1,000. At the opening of the order, your stop-loss trailing order will be fixed at $9,000 (=$10,000 - $1,000). As the price of ABC goes up to $12,000, your $1,000 trailing stop follows and is now fixed at $11,000 (=$12,000- $1,000). Suddenly, a correction occurs and the price of ABC fall back to the $10,000 mark. When the market price reach $11,000, your trailing stop order will automatically open into a market order and your position will close at around $11,000 (ABC sold). You have consequently secured $1,000 profit on the trade.

Trailing Stop Order is described here for a long position but also applies to short positions using the opposite logic.

Trailing stop orders pay taker fees (when triggered, transforms into a market order, matched immediately).

How do you rate this article?

3


TradingBull
TradingBull

Cross Exchanges trading and Digital Assets management platform


TradingBull_articles
TradingBull_articles

TradingBull publications about specialized blockchain research, news and industry-related topics.

Send a $0.01 microtip in crypto to the author, and earn yourself as you read!

20% to author / 80% to me.
We pay the tips from our rewards pool.