Hey there guys, as you can already guess by reading the heading, we are going to talk about the trailing stop loss feature. First of all, we have to start by learning about a standard stop-loss order.
What is Stop-Loss?
A stop-loss is an order placed in advance by the user on the exchange to sell his/her cryptocurrency holdings when it reaches a certain price predetermined by the user. Normally, it is used as a safety measure to limit an investor’s loss.
When a coins price falls down and matches the price predetermined by the investor in the stop-loss order, the stop-loss order gets automatically converted into a market order that enables the coin to be sold at the current price or the next best available price thus, limiting the loss and acting as a fail-safe.
For a long position, an investor places a stop-loss order below the current market price and for a short position, an investor places a stop-loss order above the current market price.
Now, as we have gone through the basics of stop-loss, it is time to learn about the advanced version that is the trailing stop-loss.
What is Trailing Stop-Loss?
A trailing stop-loss is the modified version of the stop-loss feature. It is designed to keep the order open as long as it keeps going in the investor’s favour as predetermined by him/her. If the opposite happens, the order gets closed when the price changes by a specific percentage or dollar.
The trailing stop-loss keeps getting automatically updated once a new high has been achieved by the coin in case of a long position and in the case of a short position, the trailing stop-loss gets automatically updated once a new low has been achieved by a coin. The trailing stop-loss works in one direction. Hence, once updated it won’t change back automatically to its previous value or position. So, if the trade suddenly starts to go bad. The automatically updated trailing stop-loss will be there to act as a fail-safe for maximum profits.
Let us understand the whole mechanism with an example, assume you are in a long position and have bought a coin at ₹100. You have placed a normal stop-loss at ₹90 which is 10% below the buy price. If the coin price goes down to ₹90. The order will be automatically converted to a sell order at that current price of ₹90. Thus, limiting the loss to 10%.
Now, in the case of the trailing stop-loss (long position), once the coin makes a new high like suppose from ₹100 to ₹101. The trailing stop-loss gets automatically updated to ₹90.9 from ₹90 which is a 10% gap from the coin’s current price (the difference of percentage is predefined by the investor). Let’s take round figures to understand it better, if the coin price makes a high of ₹110 then the trailing stop-loss gets updated to ₹100 (10% gap as predetermined by the user), if the price reaches a high of ₹120 then the trailing stop-loss will get updated to ₹108 (10% gap as predetermined by the user. This will keep on going as the coin price makes new highs. However, if the coins price starts going down. the trailing stop-loss won’t change and may get activated into a sell order if the price touches the trailing stop-loss price. Thus executing the sell with maximum profit.
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Disclaimer: This article isn’t a piece of financial advice. DYOR before investing.