What is a trailing stop order?
A trailing stop order is a type of order that helps traders limit their losses and protect their gains when the market swings. It places a pre-set order at a specific percentage away from the market price, allowing traders to lock in profits as the price moves in their favor.
When the market price moves favorably, the trailing stop order moves with it, maintaining the specified percentage or amount away from the market price. This allows traders to keep their position open and continue to profit as long as the price moves in a favorable direction.
However, if the market price moves in the opposite direction by a specified percentage, the trailing stop order will close/exit the trade at the market price. This helps to limit losses and protect gains by closing the trade when the price moves against the trader.
It's important to note that the trailing stop order does not move back in the other direction. Therefore, traders need to set their trailing stop order at a level that reflects their risk tolerance and market conditions. Additionally, trailing stop orders can be placed as reduce-only orders to decrease or close an open position.
How does a trailing stop order work?
As a trader, you can place a trailing stop order when entering a position initially. However, this is not a common practice among traders. Typically, traders use trailing stop orders to manage their risk and protect their gains after they've opened a position.
When you're entering a long trade, you will place a sell trailing stop order above the current market price (initially). The trailing stop price moves up by a specified percentage or amount, and it will follow the market price as it moves in your favor. This means that the trailing stop price will be adjusted upwards as the market price moves up, forming a new trailing stop price.
However, the trailing stop order will stop moving if the price moves down. A sell order will be triggered if the market price moves in the opposite direction and falls below the trailing stop price, This sell order will be executed at the next available market price, and the trade will be closed with the sell order.
If you already have an existing long position, you would place a sell trailing stop order below the current market price. As the market price moves up, the trailing stop price will move up with it by a specified percentage or amount. If the market price moves in the opposite direction and falls below the trailing stop price, a sell order will be triggered. This sell order will be executed at the next available market price, and the trade will be closed with the sell order.
A buy trailing stop order is the opposite of a sell trailing stop order.
For a short trade, when entering a position, you would place a buy trailing stop order below the current market price. The trailing stop price moves down by a specified percentage or amount, and it will follow the market price as it moves in your favor. This means that the trailing stop price will be adjusted downwards as the market price moves down, forming a new trailing stop price.
When the price moves up, the trailing stop stops moving. If the price moves more than the predetermined callback rate from its lowest price and reaches the trailing stop price, a buy order will be placed and the trade will be closed at market price.
Please note that to activate a trailing stop order as a market order to exit the trade, both conditions (activation price and callback rate) must be fulfilled.
Differences between trailing stop and stop-loss orders
- Stop-loss orders help traders reduce losses, while trailing stop orders lock in profits and limit losses at the same time.
- Stop-loss orders are fixed and have to be manually reset, while trailing stop orders are more flexible and automatically track the price direction.
How to place a trailing stop order?
To activate a trailing stop order, 2 conditions need to be fulfilled.
A buy trailing stop order will be placed if the following conditions are met:
- Activation Price ≥ Lowest Price
- Rebound Rate ≥ Callback Rate
A sell trailing stop order will be placed if the following conditions are met:
- Activation Price ≤ Highest Price
- Rebound Rate ≥ Callback Rate
1. Callback Rate
Callback rate is the percentage of movement in the opposite direction that you are willing to tolerate. The callback rate ranges from 0.1% to 5% by placing the rate manually in the “Callback Rate” field.
2. Activation Price
Activation price is your desired price level that triggers the trailing stop order. If no activation price is set, the activation price will be the market price by default (either “Last Price” or “Mark Price”, subject to trigger types).
To place a buy trailing stop order, the activation price must be lower than the market price. Conversely, the activation price must be higher than the market price to place a sell trailing stop order.
3. Types of Trigger
You can choose either “Last Price” or “Mark Price” as a trigger. If “Mark Price” is selected, when the Mark Price reaches or exceeds the activation price, the trailing stop order will be activated even though the Last Price does not reach the activation price.
Please note that Binance uses Mark Price as a trigger for liquidation and to measure unrealized profit and loss. The Mark Price is generally similar to the Last Price, but the Last Price might deviate significantly from the Mark Price during extreme price movements. Hence, please monitor the difference between the Last Price and the Mark Price. You can always cancel the order you placed, or replace the order if you would like to change the trigger from Mark Price to Last Price or vice versa.
Important Notes
For a trailing stop order to be effective, a callback rate shouldn’t be too low or too high, and the activation price shouldn’t be too close or too far away from the market price. When the callback rate is too low or the activation price is too close, the trailing stop order is too close to the entry price and is easily triggered by normal market movements. There is no room for a trade to move in the favorable direction before any meaningful price movements occur. The trade will be closed/exited when the market takes a temporary dip and recover, thus resulting in a losing trade.
When the callback rate is too high, the trailing stop order could only be triggered by extreme market movements, leaving traders at risks 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 optimal callback rate or activation price. You 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. Apart from that, always determine your callback rate and activation price based on your targeted profitability levels and acceptable losses within your capacity.
Examples
(1) Placing a sell trailing stop order for a long trade
The Last Price of the BTCUSDT perpetual contract is 10,000 USDT. User A places 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 USDT.
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 (5%) ≥ Callback Rate (5%)
Note:
Rebound Rate = (Highest Price - Rebound Price) / Highest Price
= (11,000 - 10,450) / 11,000
= 5%
(2) Placing a sell trailing stop order for a long trade
The Last Price of the BTCUSDT perpetual contract is 10,500 USDT. User A places a trailing stop order as follows:
- Callback rate: 2%
- Activation price: 11,000 USDT
- Trigger: Last Price
Situation A - Both conditions are met
The Last Price increases from 10,500 USDT to 11,500 USDT (the 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 following conditions are met:
- 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 is met
The Mark Price increases from 10,500 USDT to 11,500 USDT (the highest price) and later drops to 11,450 USDT.
The trailing stop order is not executed and no sell order is issued at market price as only one of the following conditions is met:
- Activation Price (11,000 USDT) < Highest Price (11,500 USDT) = Condition is met
- Rebound Rate (0.43%) < Callback Rate (2%) = Condition isn’t met
Note:
Rebound Rate = (Highest Price - Rebound Price) / Highest Price
= (11,500 - 11,450) / 11,500
= 0.43%
(3) Placing a buy trailing stop order for a short trade
The Mark Price of the BTCUSDT perpetual contract is 10,500 USDT. User A places a trailing stop order as follows:
- Callback rate: 3%
- Activation price: 10,000 USDT
- Trigger: Mark Price
Situation A - Both conditions are met
The Mark Price drops from 10,500 USDT to 9,500 USDT (the lowest price) and later increases to 9,800 USDT.
The trailing stop order is executed and a buy order is placed at market price as the following conditions are met:
- 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 is met
The Mark Price drops from 10,500 USDT to 9,900 USDT (the lowest price) and later increases to 9,950 USDT.
The trailing stop order is not executed and no buy order is issued at market price as only one of the following conditions is met:
- 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%