Determining the specific risk management method is the most effective component of a successful trading strategy. It is essential to know the best place to stop a trade prior to making a decision to enter it. Making sure that the trade exits when it is time to exit is one of the biggest dilemmas that traders face every day. There’s a method that can help lower risk and boost profits – helpful resources!
Yes, it’s Trailing Stop! This is a dynamic, exit order that combines risk management and trade automation. This is an advanced order type that will automatically follow your position when the market advances to your advantage, aids in minimizing the possibility of losses. Stop orders are thought of as one of the most effective cryptocurrency trading tools that permit you to sell once the uptrend runs out of the channel and buy after the downtrend reverses.
Trailing Stop Order
A stop order permits its traders to make a predetermined order in a certain amount/percentage away from the market during price swings. This type of order allows traders to safeguard gains and minimize losses if the value of any trade does not move in the direction that is favorable to the trader.
Let’s look at the basics about Trailing Stop order:
This type of order comes with the option of a stop (order trigger) that traces the market with a specified distance i.e. the trailing distance is when the price shifts in the specified direction. It stays in place even when the price changes the other way. If the market price reaches the stop price, the underlying limit or market order is placed.
Stop order works in two ways: either buy or sell. Let’s have a look at each one.
Buy trailing
The trailing buy order tracks the market as it goes down. The Trailing Buy Order is activated when the market price rises above the set trailing distance.
Trailing Sell
This order tracks the price of the market as it increases. It triggers a buy order when the price of the market falls by the amount that is specified as the trailing distance. Stop orders can be used to take over or exit existing positions, either long or short.
Examine these order types and find out how Trailing Stop Orders work.
The Trailing Stop Sale
The trader is able to place a sell-order above the entry point for a long-term trade. Here, the trailing price increases by a certain percentage. If the asset’s price moves upward, a new stop will be created. If the price falls then the trailing stop moving. A sell order is placed when the price rises more than the callback rates from the highest price and then reaches at the price. The transaction is concluded with a sell order at the current market price.
Now, let’s move to the trailing stop buy option which is the opposite of the trailing stop sell order.
Trailing Stop Buy
A trailing buy order is placed for a trade that is short below the trade entry. This order type moves the stop price downwards by the amount. If the price falls, a new price is calculated. If the price rises then the stop will be stopped and an order to buy is made if the price moves more than the callback rates from its lowest value, and it reaches the stop price. Keep in mind that Trailing Buy orders can be utilized in short positions, and sell orders can be utilized in long positions.
What’s the process for how the trailing stop order function?
A trailing stop is set at a certain distance away from the starting price and it only begins to trail if an asset moves in your favor. The trailing stop will be dragged when the price rises. The trailing stop will stay at the level that it was dragged up until the point at which the price stops rising.
To understand better the way it works, let’s look at a stock using the following data:
Price of purchase = $10
The price that was last seen at the time of setting trailing stop = $10.05
The total amount of the trailing period is 20
Immediate effective stop loss value = $9.85
The trailing stop on your account will rise to $10.78 if the asset price increases to $10.98. If the price declines to $10.90 the stop remains at $10.78. And, if the price continues to decline until it reaches $10.77, it will immediately cause a market purchase. Your order will be calculated on $10.77 as the most recent price. If the bid price is $10.76 then the trade will be closed. In this case, the net gain for the trader will be $0.76 per share.