A trailing stop is a tool that helps you automatically lock in profits as the price of an asset rises, without locking it in at a specific level, but following the price movement. Here's how it works
1. Setting a trailing stop: You set a percentage or a fixed amount of deviation that the price can fall after an increase. This value is called a “trailing offset”.
2. How it works: If you have opened a long (buy) position, the trailing stop moves up when the asset price rises, remaining at a set distance from the current price. For example, if the offset is set to 5%, the trailing stop will always be 5% below the highest price reached by the asset.
3. Stop Triggered: If the price starts to fall and reaches the trailing stop level you set (in our example, 5% below the high), the position is automatically closed. This allows you to lock in profits without having to manually monitor every price change.
4. For short positions: In the case of a short (sell) position, the trailing stop works in reverse, following the price decline and locking in profits if the price starts to rise by a set distance.
Example of work
Let's say you bought an asset at $100 and set a trailing stop at 5%. If the price rises to $110, the trailing stop moves up to $104.5 (5% below the high). If the price falls to $104.5, the position is closed, locking in your profit. If the price continues to rise, the trailing stop also moves up, maintaining a distance of 5% from the highest price.
