What is a Trailing Stop Order

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Presentation Description

A trailing stop order is an automated instruction set on a trade that can be used to both limit losses and maximize profits.

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Presentation Transcript

Slide 1:

What is a Trailing Stop Order?

Slide 2:

A trailing stop order is an automated instruction set on a trade that can be used to both limit losses and maximise profits. When a trader sets a standard stop-loss order, they fix a price point which, if reached by the cryptocurrency , submits a market order to close out the trade. If the starting price of any currency when a long trade is opened is $10, a stop loss might be set at $9.50. This means the maximum loss the trader can sustain is 5%. If the price moves to $10.50 and the trader wants to protect their profit by closing the trade should the price direction turn against them, they might change the stop loss to $10.10. This means if the price of the instrument being traded takes a downward turn, the trade will close at $10.10 and 1% profit.

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Standard stop losses must be changed manually as an instrument’s price movement develops over the course of time the trade remains open. A trailing stop order removes the need to manually adjust the price point a trade will close at because a stop order closes the trade at a particular price point. Compared to a trailing stop order closes the trade when it changes by a chosen percent in the wrong direction. If an instrument’s price at the beginning of a trade is $10, a trailing stop order could be set at 5% below that starting price. This would again be $9.50 at the beginning of the trade but would automatically adjust or ‘trail’ if the instrument’s price subsequently rose. If it moved to $11, the price 5% below that would be $10.45 which becomes the price point the trailing stop order would automatically adjust to without having to be manually reset.

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A trailing stop order could also be set to adjust its percentage difference from the current price as it moves. Once the instrument a long trade is open on has already gained 2%, the trailing stop loss could be set to adjust to 1% down from the current price. This means that once a 2% movement in the right direction has been achieved, the trader wants to lock in at least 1% profit, if the price movement subsequently turns.

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2 Types of Stop Orders

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Both, trailing stop market and stop limit orders are designed to allow an investor to specify a limit on the maximum possible loss, without setting a limit on the maximum possible gain. ‘Buy’ trailing stop orders are the mirror image of sell trailing stop orders and are generally used in falling markets.

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When to Use a Trailing Stop Order? Trailing stop orders are used to keep trades within the downside to upside ratio set out in the trader’s wider strategy. If a trader’s strategy is to never risk more than 1% of overall capital in a single trade, a trailing stop order will be initially set at the level so that a price movement in the wrong direction will not cost more than 1% of trading capital. If the price subsequently moves in the right direction for the trader, a trailing stop order will re-adjust ensuring minimum profit is always locked in. If a trader’s analysis has highlighted resistance levels on the way up, the trailing stop order would likely be set to adjust to a closer level to price at those points of resistance as the probability of a reversal would be considered heightened. If the price does then turn, the trailing stop order will lock in profits before a continuation of the reversal can erode them.

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