This article focuses on “what is trailing stop loss?” and how to maximize profit using Trailing Stop Loss order as a trader. In one of our articles, we discussed about that differences between stop loss order and stop limit order. Prior knowledge of the both is needed before we grasping what trailing stop loss is.
What Is Trailing Stop Loss?
A trailing stop loss is a modification of a typical stop loss order that can be set at a defined percentage or dollar amount away from a trade or asset current market price. For a buy or long position , an investor places a trailing stop loss below the current market price and for a sell or short position, an investor places the trailing stop above the current market price.
How To Maximize Profit Using Trailing Stop Loss
A trailing stop is designed to protect gains by enabling a trade to remain open and continue to profit as long as the price is moving in the investor’s favor. The order closes the trade when the trade reverses against investor’s prediction and hits the stop loss order.
Here is an example to aid understanding Trailing Stop loss.
Assume you bought a coin at the price of 100usd and put the trailing stop loss at 90usd (10 dollars below the buying price).
If the price drops to 90usd then your stop loss will be activated and the trade is closed with a 10% loss.
But if the price of the coin increase to 130 then the trailing stop loss automatically shifts to 120 (means 10 points below the current price). If the price drops to 120 then the trade is closed automatically (the 120 trailing stop loss will be activated), If the price continues to increase the trailing stop also increase with it and remains always 10 points below the current price. You need to do it manually for spot trading and this is known as “Locking In Profits”.
Currently, most centralised exchanges like Binance only supports trailing stop loss for the Futures market or traders.