Complete Guide: How to Use Trailing Stop Orders to Protect Your Gains

A trailing stop order is a sophisticated tool that enables traders to safeguard their profits and manage risks more precisely. Unlike traditional stop orders, it behaves dynamically, automatically following market price movements. This tool is particularly valuable when a trade is moving favorably, but you cannot constantly monitor your position or are uncertain about the maximum price level it will reach.

What Is a Trailing Stop Order and Why Does It Matter

A trailing stop order works in a unique way: instead of being fixed to a specific price, it moves as the market advances. You set a trigger point that can be expressed in two distinct ways: a percentage of the current price or an absolute amount in currency. When the price rises, your order follows in the same direction, maintaining the distance you configured. If the market reverses and falls to that pre-set level, the order is automatically triggered and converted into a market order.

It is also possible to set a specific activation price, which determines the exact moment your trailing stop will start tracking the market price. This flexibility makes the tool adaptable to different strategies and market conditions.

Trailing Stop with Percentage Variation: Practical Examples

Suppose the current price of an asset is $100. You set a trailing stop order to sell 10% below the market price.

Three scenarios can occur:

Scenario 1 – Immediate Drop: If the price drops to $90 (a 10% decrease), your order is triggered and converted into a market sell order.

Scenario 2 – Rise followed by partial decline: The price rises to $150, then falls to $140. Your trailing stop order is not triggered because the trigger level is now $135 (10% below the new high of $150). The 7% decline does not reach this level.

Scenario 3 – Significant rise with subsequent fall: The price reaches $200 and then drops to $180. In this case, your order is triggered because the trigger level is now $180 (10% below $200), matching the current price.

Trailing Stop with Constant Variation: Usage Guide

Now consider a fixed-value approach. The current price is $100, and you set a trailing stop to sell with a constant distance of $30 below the market price.

Scenario 1 – Drop to trigger level: If the price falls to $70, your trailing stop order is triggered and converted into a market order, as it reached $30 below your initial point.

Scenario 2 – Rise followed by partial decline: The price rises to $150 and then falls by only $20, reaching $130. Your order is not triggered because the protection level is now $120 (a $30 drop from the maximum). The current decline does not reach this level.

Scenario 3 – Sharp rise with proportional fall: The price rises to $200 and then drops $30, reaching $170. This time, your order is triggered because the protection level is $170 (a $30 drop from $200).

Important Considerations When Executing Trailing Stop Orders

Before using this tool, it is essential to understand some critical points:

Positions and margin: Your positions will not be frozen while the trailing stop order is pending. Ensure you have sufficient balance or margin to avoid execution issues. You remain with these resources available until the order is triggered.

Execution limits: Market orders may not be filled if there are price restrictions, insufficient balance, non-trading periods, or technical failures. These are the main reasons why a trailing stop order may be triggered without resulting in execution.

Post-trigger tracking: After the order is triggered, it functions as a regular market order, subject to the same limitations as any immediate sell operation. Unfilled orders will remain listed in your “Open Orders” section.

When Your Trailing Stop Order May Not Be Triggered

There are several situations where your order may not activate as expected. Price restrictions in the market, insufficient margin in your account, periods when the asset is not being traded, or technical issues on the platform are the most common causes. Therefore, it is prudent to regularly monitor the status of your trailing stop orders, especially in volatile markets.

Legal Information and Disclaimer

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