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What Is a Trailing Stop Order
What Is a Trailing Stop Order
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 losses and protect gains when a trade does not move in the direction that traders consider favorable.
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.
How does a Trailing Stop Order work?
Traders can place a trailing stop order when entering a position initially, though this is not a common move. The trailing stop could also be placed as a reduce-only order with the aim to decrease or close an open position.
For a long trade, a “sell” trailing stop order would be placed above the latest transaction price. When the price moves up, the trailing stop price moves up by a specific trailing percentage, eventually forming a new trailing stop price. When the price moves down, the trailing stop also 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 close with the sell order at the market price.
A ”buy" trailing stop order is the opposite of a “sell” trailing stop order.
For a short trade, a “buy” trailing stop order would be placed below the latest transaction price. When the price moves down, the trailing stop price moves down by a specific trailing percentage, eventually forming a new trailing stop price. When the price moves up, the trailing stop also 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 close with the buy order at the market price.
Please note that both conditions (activation price and callback rate) need to be fulfilled in order to activate the trailing stop order to close/exit as a market order.
Difference Between Trailing Stop Order and Stop Loss Order
1. A stop loss order helps to reduce losses, while a trailing stop order locks in profit and limits loss at the same time.
2. A stop loss order is fixed and has to be manually reset, while a trailing stop is more flexible and automatically tracks 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% and users can enter this rate manually in the “Callback Rate” field. Alternatively, there are preset options such as “1%” or “2%”for quick selection.
2. Activation Price
Activation price is your desired price level that triggers the trailing stop.
To place a buy trailing stop order, the activation price must be set lower than the current market price. Conversely, the activation price must be higher than the current market price for a sell trailing order.
The market's highest/lowest price must reach or exceed the activation price in order to meet the condition.
3. Types of Trigger
You can choose either “Last Price” or “Mark Price” as a trigger. If “Mark Price” is selected, the trailing stop order will be activated when the Mark Price reaches or even though the Last Price has not reached 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 dramatically and significantly from the Mark Price during extreme price movements. Hence, please monitor the price 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 and vice versa.
Important Notes
Setting an optimal callback rate and activation price could be a daunting process.
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 far away from the current price. When the callback rate is too small or the activation price 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 close/exit at a point where the market took a temporary dip and then recovered, 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 unnecessarily large risks.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 constant price fluctuations in the market. You should always carefully consider whether a trade is consistent with your risk tolerance, investment experience, financial situation 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.
Examples
(1) Placing a “Sell” Trailing Stop Order for a long trade
The current last price of BTC/USDT 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 price is formed at 10,450 USDT. When the price moves down, the trailing stop also stops. A sell order will be executed at market price to close the position when the price moves more than 5%, and which reaches and exceeds the trailing stop price at 10,450 USDT.
The trigger conditions are 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) Placing a “Sell” Trailing Stop Order for a long trade
The current Last Price of BTC/USDT 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 significantly from 10,500 USDT to 11,500 USDT (peak 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 significantly from 10,500 USDT to 11,500 USDT (peak 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 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 is not 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 current Mark Price of BTC/USDT 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 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 is 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 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%