The primary element of any successful trading strategy is the selection of a risk management tool. One must know where to close a trade prior entering it. One of the biggest issues that traders face is knowing when to exit the trade. There is however an effective tool that one can use to reduce their risks and maximize their gains, more help?
Yes, it’s Trailing Stop! This dynamic option combines trading automation and risk management. This sophisticated type of order monitors your position whenever markets shift in your favor. It can help reduce any potential losses. Stop orders are one of the best crypto trading tools. They let you sell when the upward trend has ended and to buy as the downtrend kicks in.
Trailing stop order
Stop orders allow traders to make a predetermined order at a specific amount/percentage of the market when price swings. This type of order allows traders safeguard their gains and limit the losses when the price of any trade doesn’t move in the desired direction of the trader.
We’ll start with a simple explanation of the Stop Order: Trailing Stop Order:
The type of order described is defined by the use of a stop (order-trigger) which tracks the market’s price over a defined distance. the trailing distance gets increased when the price moves the direction you want it to move. However, it is not removed even if the price changes in the opposite direction. The limit or order of market is placed when the market price is at or above the stop price.
Stop order can be used in two ways, either to purchase or sell. Let’s take a look at them one by one:
Trailing Buy
The purchase order trailing the market tracks the decline of the market. It triggers a purchase order if or when the price increases from its previous low by the amount that is set as the trailing distance.
Trailing Sale
This order follows the market’s price as it rises upwards. It triggers a purchase order in the event that the market price decreases to the value specified as the trailing distance. Stop orders can be used to move into and out of existing positions, no matter how long or short.
Let’s take a look at these types of orders and the way Trailing Stop orders function?
Trailing Stop Sell
A trader could create a sell order above the entry for long-term trading. Here, the trailing price increases by a certain percentage. If the asset price moves upward, a new stop will be set up. And, if the price moves down it will stop the trailing moving. Then, a sell order is placed when the price is higher than the callback rate of the price at which it is highest and gets at the price. The trade is closed with a sell order with the market’s current price.
The next step is the trailing stop buy order that is the opposite of trailing stop sell order.
Trailing Stop Buy
A trailing order to buy is placed below the entry of a trade. The type of order is able to move the stop price down by an amount. The stop price will be formed when the price falls. If the price rises then the stop will be stopped and a buy order is issued when the price increases more than the callback rate of the lowest price until it is at the stop price. It is possible to use trailing buy orders in short positions, as well as sell orders in long positions.
What’s the procedure for a trailing stop order work?
A trailing stop order is placed at a predetermined distance away from the starting price and it only begins following if the value of an asset changes in your direction. When the price increases and the trailing stop gets dragged. Then, if the price ceases to move, the trailing stop remains at the same level it was dragged to, thus safeguarding the loss of the trader, while locking in the profits.
Let’s examine a stock with the following information in order to better understand its workings:
Buy for $10
The price that was last seen at the time of setting trailing stop = $10.05
The remaining amount is 20
Immediate effective stop loss value = $9.85
The trailing stop of yours will increase to $10.78 in the event that the asset’s price goes up to $10.98. If the price declines to $10.90 the stop is set at $10.78. And, if the price continues to drop until it is $10.77 at any time, it will cause a market purchase. The order will be based on $10.77 in the last price. If the bid price was $10.76 this means the position can be closed at this time. Here the net gain of the trader would be $0.76 per share.