A trailing stop order is a type of order that enables a trader to maximize the gains he makes on an open position while protecting them. It is an advanced stop loss order model that automatically places an order at a predetermined point above or below the current price.
Trailing stop-loss orders are useful when a trade is going in the trader's direction, but he is either unable to monitor his position closely or is unsure of how far the price will go.
There are two types of trailing stop loss variables: percentage and fixed variable. You can also specify an activation price that will determine when the trailing stop loss is triggered to track the market price.
Example of a trailing stop order to sell (percentage)
Let's say the current price is $100, and you set a trailing stop-loss order to sell your assets at 10% below the market price.
If the price drops 10% from $100 and reaches $90, your trailing stop order will be triggered and converted into a market price order to sell.
If the price rises to $150, then falls by 7% and reaches $140, your trailing stop loss order for sale will not be triggered. Because the trailing stop order will be activated at only $135 (10% below the market price).
If the price rises to $200, then falls 10% and reaches $180, your trailing stop order will be triggered and converted into a market price order to sell at $180.
Example of a trailing stop loss order to sell (fixed variable)
Let's say the current price is $100, and you set a trailing stop-loss order to sell your assets at $30 below the market price.
If the price drops $30 from your entry point of $100 to $70, your trailing stop order will be triggered and converted into a sell order at the market price.
If the price rises to $150, then falls by $20 and reaches $130, your sell trailing stop order will not be triggered. Because the trailing stop order will be activated at only $120 ($30 below the market price).
If the price rises to $200, then falls by $30 and reaches $170, your trailing stop order will be activated and converted into a market price order to sell.
Important points you should know
Your positions and margin will not be frozen until the trailing stop loss order is activated. So, please ensure that you have enough positions or margin available.
A trailing stop order may not be activated successfully due to price restrictions, position limitations, insufficient margin, off-trade mode, and system errors. Once successfully activated, subsequent orders may not be executed at the market price, just like orders at the regular market price. You can find unfilled market price orders under open orders.
