Trading 101 — Order types: Trailing Stop Order (TSO)
A trailing stop order is used to secure profits and limit losses as the trade moves favorably for the trader. As the market price moves up, the stop-loss order value is adjusted to remain either at a % of the current market value or at a fixed distance 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. Trail order is also not shown on public order book.
Cons: Establishing the ideal distance 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 24h a day but still want to prevent from a fast market correction happening in between.
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 is described here for a long position but also applies on short positions (opposite logic).
Trailing stop orders pay taker fees (when triggered, transforms into a market order, matched immediately).
Telegram community: https://t.me/TradingBull_DA
Twitter: @_Digital_Assets
