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What is a Trailing Stop Order?
Binance
2020-04-24 11:35

What is a Trailing Stop Order?

A trailing stop order allows traders to place a pre-set order at a specific percentage away from the market price when the market swings. It helps traders to limit the loss and to protect gains when a trade does not move in the direction that traders consider unfavorable. 

The trailing stop moves by a specified percentage when the price moves favorably. It locks in profit by enabling a trade to remain open and continue to profit as long as the price is moving in the direction favorable to traders. The trailing stop does not move back in the other direction. When the price moves in the opposite direction by a specified percentage, the trailing stop will close/exit the trade at market price. 

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Note: Trailing stop order is supported on the latest version of the trading interface only. 

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How does a Trailing Stop Order work?

Traders can place a trailing stop order when entering into a position initially, though not common. The trailing stop could be placed as a reduce-only order with the aim to decrease or to close an open position, too. 

For a long trade, a sell trailing stop order would be placed above the trade entry. The trailing stop price moves up by a trailing percentage. A new trailing stop price will be formed when the price moves up. When the price moves down, the trailing stop stops moving. A sell order will be issued if the price moves more than the predetermined callback rate from its peak price and reaches the trailing stop price. The trade will be closed with the sell order at market price mentioned above. 

 A ”buy" trailing stop order is the mirror image of a “sell” trailing stop order".

For a short trade, a buy trailing stop order would be placed below the trade entry. The trailing stop price moves down by a trailing percentage. A new trailing stop price will be formed when the price moves down. When the price moves up, the trailing stop stops moving. A buy order will be issued if the price moves more than predetermined callback rate from its lowest price and reaches the trailing stop price. The trade will be closed with the buy order at market price mentioned above. 

Please note that there are 2 conditions, namely activation price and callback rate will need to be fulfilled in order to activate the trailing stop order to be issued as a market order to close/exit the trade. 

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Difference Between Trailing Stop Order and Stop Loss Order

  1. Stop loss order helps to reduce losses while trailing stop order locks in profit and limit loss at the same time. 
  2. Stop loss order is fixed and has to be manually reset while trailing stop is more flexible and automatically tracks the price direction.

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How to Place a Trailing Stop Order?

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There are 2 conditions a trailing stop order needs to be fulfilled in order to get activated.

For a buy trailing stop order will be placed if the conditions are met as follows:

  • Activation Price >= Lowest Price and
  • Rebound Rate >= Callback Rate 

For a sell trailing stop order will be placed if the conditions are met as follows:

  • Activation Price <= Highest Price and 
  • Rebound Rate >= Callback Rate 

1. Callback Rate

Callback rate determines the amount a trailing stop price will trail the price. The callback rate range is available from 0.1% to 5% by placing the rate manually in the “Callback Rate” field. Alternatively, quick options such as “1%” and “2%” are available for quick selection. 

2. Activation Price

Traders can fill in the price level that triggers the trailing stop. If no activation price is being filled, the activation price will be the market price by default (either “Last Price” or “Mark Price” subject to the choice of trigger types). 

In order to place a buy trailing stop order, the activation price must be less than the current market price. Conversely, the activation price must be larger than the activation price to place a sell trailing order. 

The market's highest / lowest price must reach or exceed the activation price in order to meet the condition. 

3. Type of Trigger 

Traders could choose either “Last Price” or “Mark Price” as a trigger. If traders select “Mark Price” as a trigger, when the Mark Price reaches or exceeds the activation price, the trailing stop will be activated even though the Last Price does not reach the activation price.

Please be noted that Binance uses Mark Price as a trigger for liquidation and to measure unrealized profit and loss. The Mark Price is generally a few cents from the Last Price. However, the Last Price might deviate dramatically and significantly from the Mark Price during extreme price movements. Hence, please monitor the price difference between Last Price and Mark Price. You could always cancel the order you have placed and replace the order if you would like to change the Trigger from Mark Price to Last Price or vice versa.

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Important Notes

Setting an optimal callback rate and activation price could be a daunting process. 

In order for a trailing stop to be effective, a callback rate should neither be too small or too large; and the activation price should neither be too close or too far away from the current price. When the callback rate is too small or the activation is too close, the trailing stop is too close to the entry price and is easily triggered by normal daily market movements. There is no room for a trade to move in the direction favorable to traders before any meaningful price moves occur. The trade will get closed/exited at a point where the market just took a temporary dip and then recovered, thus resulting in a losing trade. 

When the callback rate is too large, the trailing stop will be only triggered by extreme market movements which means the traders are taking on the risk of unnecessarily large losses. 

A higher callback rate is generally a better bet during volatile periods while a lower callback rate is preferable during normal market conditions. 

There is no ideal optimal callback rate and activation price. Traders are advised to revise their trailing stop strategy from time to time due to the constant price fluctuations in the market. You should always carefully consider whether a trade is consistent with your risk tolerance, investment experience, financial condition and other considerations that may be relevant to you. Other than the range of price changes, always determine your callback rate and activation price based on your targeted profitability levels and acceptable losses within your capacity.

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Examples

 

(1) A sell trailing stop order for a long trade

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The current last price of BTCUSDT perpetual contract is 10,000 USDT. User A place a trailing stop order as follows:

  • Callback rate: 5%
  • Activation price: 10,500 USDT
  • Trigger: Last Price

The trailing stop price is 9,500 USDT when the last price is 10,000 USDT. A new trailing stop price is formed at 9,975 USDT [last price* (1 - callback rate)] when the price increases to 10,500. 

The trailing stop price stops when the price moves down. When the price moves to its peak price at 11,000 USDT, a new trailing is formed at 10,450 USDT. When the price moves down, the trailing stop price stops again. A sell order will be executed at market price to close the position when the price moves more than 5%, reaching and exceeding the trailing stop price at 10,450 USDT. 

The conditions are met as follows:

  • Activation Price (10,500 USDT) < Highest Price (11,000 USDT)   
  • Rebound Rate (9.09%) > Callback Rate (5%)   

Note:
Rebound Rate = (Highest Price - Rebound Price) / Highest Price 
= (11,000 - 10,000) / 11,000 
= 9.09%

(2) Place a Sell Trailing Stop Order for a Long Trade

The current last price of BTCUSDT perpetual contract is 10,500 USDT. User A place a trailing stop order as follows:

  • Callback rate: 2%
  • Activation price: 11,000 USDT
  • Trigger: Last Price

Situation A - Two Conditions are Met

The last price increases drastically from 10,500 USDT to 11,500 USDT (Highest price) and later drops to 11,200 USDT.

The trailing stop order is executed and a sell order is issued at market price as the conditions are met as follows:

  • Activation Price (11,000 USDT) < Highest Price (11,500 USDT)    ---> Condition is met
  • Rebound Rate (2.61%) > Callback Rate (2%)    ---> Condition is met

Note:
Rebound Rate = (Highest Price - Rebound Price) / Highest Price 
 = (11,500 - 11,200) / 11,500
 = 2.61%

Situation B - Only One Condition are Met
The mark price increases drastically from 10,500 USDT to 11,500 USDT (highest price) and later drops to 11,450 USDT. 

The trailing stop order is not be executed and no sell order is issued at market price as only one of the conditions is met as follows:

  • Activation Price (11,000 USDT) < Highest Price (11,500 USDT)  ---> Condition is met
  • Rebound Rate (0.43%) < Callback Rate (2%) ---> Condition is not met

Note:
Rebound Rate = (Highest Price - Rebound Price) / Highest Price 
 = (11,500 - 11,450) / 11,500
 = 0.43%

(3) Place a Buy Trailing Stop Order for a Short Trade

The current mark price of BTCUSDT perpetual contract is 10,500 USDT. User A place a trailing stop order as follows:

  • Callback rate: 3%
  • Activation price: 10,000 USDT
  • Trigger: Mark Price

Situation A - Two Conditions are Met
The mark price drops drastically from 10,500 USDT to 9,500 USDT (lowest price) and later increases to 9,800 USDT. 

The trailing stop order is executed and a buy order is issued at market price as the conditions are met as follows:

  • Activation Price (10,000 USDT) > Lowest Price (9,500 USDT)    ---> Condition is met
  • Rebound Rate (3.16%) > Callback Rate (3%)    ---> Condition is met

Note:
Rebound Rate = (Rebound Price - Lowest Price) / Lowest Price 
 = (9,800 - 9,500) / 9,500
 = 3.16%

Situation B - Only One Condition are Met
The mark price drops drastically from 10,500 USDT to 9,900 USDT (lowest price) and later increases to 9,950 USDT. 

The trailing stop order is not be executed and no buy order is issued at market price as only one of the conditions is met as follows:

  • Activation Price (10,000 USDT) > Lowest Price (9,900 USDT)  ---> Condition is met
  • Rebound Rate (0.51%) < Callback Rate (3%) ---> Condition is not met

Note:
Rebound Rate = (Rebound Price - Lowest Price) / Lowest Price 
 = (9,950 - 9,900) / 9,900
 = 0.51%


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