Have you ever
lost out on your profits on a good crypto trading because the market has
reversed suddenly when you were away from your computer/laptop? Yes! Then you
are not alone!
Fortunately,
trailing stop loss tools can prevent this from happening again.
What is trailing stop loss?
A trailing stop
loss tool is just like the regular stop-loss feature used in crypto trading for
open trading positions. It prevents the trader from losing a position above a
certain amount if the crypto asset’s price moves in the wrong direction.
The key
difference between regular stop loss and trailing stop loss tool is that
trailing S/L orders help a trader to lock in their profits which they have
already made on a good trade without having to close the position. Additionally, it works as a crypto trading bot and allows the
trader to leave his phone or computer screen without worrying that they will
lose money if the market reverses.
If the current price
of BTC was $100 and you have set a Trailing stop loss of 10% then your TSL
would begin at $90 and follow the price at a maximum deviation of 10%
|
S. No.
|
BTC price per unit
|
Trailing Stop Loss price
|
|
1
|
$100
|
$90
|
|
2
|
$102 (up)
|
$91.80
|
|
3
|
$05 (up)
|
$94.50
|
|
4
|
$101 (correction)
|
$94.50
|
|
5
|
$105(up)
|
$94.50
|
|
6
|
$108(up)
|
$97.20
|
|
7
|
$112(up)
|
$100.80
|
|
8
|
$108(correction)
|
$100.80
|
|
9
|
$100.80(correction)
|
$100.80(triggered)
|
Now, you might
be thinking that it’s amazing and why not use this all the time?
But, that would
be a bad idea! A Trailing Stop Loss is a tactical tool that needs extra
protection to throw. If it is not used correctly, you would most likely lose
money.
How does a trailing stop loss order works?
Trailing stop
tools are perfect to exit your exiting positions- long or short. The trailing
stop loss orders are usually set at a fixed distance away from the current
market price and move in line with increasing/decreasing prices.
If the trailing
stop is placed on the buy order, it will rise as the price increases while
maintaining the trailing distance. However, trailing stop loss will not move if
the price reverses and it will close the trade.
Trailing stop
loss moves along with the price of the asset you are trading and works for both
buy and sell positions on the crypto trading platform:
Let’s understand this with an example:
You open a trade
on BTC at $1450 with a buy order of $100. You set trailing stop loss at $10
which is 10% of the trade amount. The price of BTC reaches $1475 and you think
that it may go higher and don’t want to exit the trade.
In this
situation, your trailing stop loss moves with an increase in price and will
automatically close if your position loses $10 from the current price of $1475.
This is where the
trailing stop loss is beneficial. If the price goes up, your position will be
safe as it is still open. Let’s say BTC hits at $1485, but takes a sudden turn
at $1450. Your trailing stop loss would have sold your position at $1475
preserving your profits even if you are not available at your system.
This case also works the same with a down/sell
position
You open a sell
position at $1450 with $100 trade on BTC. You put $10 trailing stop loss.
Suppose the price moves down to $1435, but then reverses back to $1450 while
you were busy in having your lunch.
Your trailing
stop loss would have closed your position at $1445 which would have preserved
some profit for you despite the quick reversal.
What is the good percentage for Trailing stop loss
strategy?
A good trailing
stop loss percentage in any crypto trading strategy is either 10% or 15% which
works great with most of the stocks. Another strategy to determine a trailing
stop-loss distance is to use the average volatility of the crypto assets as a
guide.
Here is another
example:
Let’s say you
pursue a long strategy which means you have bought coins at a low price and
then sell when the prices move up.
In this case,
it’s important for you to sell your crypto assets before the price moves down.
If you add a trailing stop loss of 10% to a long position, a sell order will be
activated when the price drops by 10% from its latest peak after the purchase.
So, unlike standard stop-loss that is activated when the price drops 10% from
the initial price, the trailing stop-loss will be recalculated from the latest
peak price of the crypto asset.
Correspondingly,
if you place a 10% trailing stop loss to the short strategy, a buy order will
be placed when the price of the asset crosses the 10% mark. This might be
somewhat risky in crypto’s volatile market. And, it’s better to analyze the
volatility levels and market trends for every asset individually before setting
the trailing distance for each order.
When can you use trailing stop loss?
Trailing Stop
Loss can be used in many situations while trading for crypto assets. Some of
these situations are:
- When the trader has an option
to put in this order type with their crypto exchange platform or if there is a crypto trading bot or software that
offers such feature and will work automatically.
- When the trader is convinced
that they will only incur a certain percentage of loss in case the price drops.
However, when the market price increases, they will be able to benefit from the
gains.