Trailing Stop Loss | How Trailing Stop Loss Works

So, you are a beginner? And, you are losing money in this volatile crypto trading?

Well, it might be due to unawareness of advanced trading tools that you can use but aren’t aware of them yet.

Don’t know about the advanced order types, strategies, and how to use them?

Even, I had this problem, when I started trading on cryptocurrencies. But, you know when I discovered stop-loss and stop-limit features at Growlonix that almost all the major crypto exchanges provide; crypto trading has become very easy.

Well, you know these features aren’t as complicated as they sound, and here is the introductory guide for you which will help in preventing crypto losses.

Table of Contents

What is stop-loss?

As the name suggests, stop-loss is a feature inbuilt in almost all the crypto exchanges to prevent further losses on any trade that you have already done. We all trade for profits and not for losses, so the stop-loss feature is the best option.

Stop-loss orders can be set at the time of trade in exchanges and will be executed automatically when the preset conditions are satisfied. Let’s understand it with an example:

Let’s say you bought BTC at $20,000 and now if the price is moving up then you are profiting. But you will start losing if the price drops suddenly.

It’s a simple mathematical calculation. Isn’t it?

What if we prevent losses with the stop-loss feature if the price starts to move down? In this case, the trader will place a sell order if the amount is lesser than the actual purchase amount.

For example, we will set a stop loss order at $19,900, and when this price is reached, the stop-loss order will be triggered, and BTC will be sold at this price.

One might say, still, there is a loss of $100. But the idea behind the stop loss feature is to minimize your losses in case of a drastic pullback of the price of the cryptocurrency.

To understand this feature, assume that you slept at night without activating the stop-loss feature. And, at this time, the price of BTC starts falling and within an hour it has dropped 30% in price.

So, there will be a complete loss. But if you set a stop-loss feature, you can hedge your risk while you are not available in your system. When you put your whole amount to be sold in an event of stop loss, the condition is called Complete Stop Loss.

But there is another strategy that is known as partial stop loss where you decide to sell half or some amount of your crypto assets that you have purchased in an event when triggering a stop-loss order.

So, this type of feature becomes important in the cryptocurrency space which is so volatile.

Say, you have purchased 100 BTC for $15000 each and have set stop loss at $14900 and go to sleep. The price dwindles down and stop loss is triggered at $14900. Here, you lost 100 x 100 = $10,000. But in the morning, the price has reached $15500 per BTC due to volatility. Now, you will feel forced to buy BTC at this price, this is called an Indirect Loss. But, if you have set a partial stop-loss, it would have resulted in less loss.

Another, very advanced form of stop-loss feature is trailing stop loss which is the most appropriate form of stop-loss in this volatile crypto world.

A stop-loss is designed to limit an investor’s loss on a security position. Setting a stop-loss order for 10% below the price at which you bought the stock will limit your loss to 10%. For example, let’s say, you just purchased BCH at 0.11 BTC. Right after buying the crypto asset, you enter a stop-loss order for 0.09 BTC. This means that if the stock falls below 0.09 BTC, your coin will then be sold with the next order type.

Positives and Negatives

The advantage of a stop order is you that don’t have to monitor on a daily basis how a stock is performing. This is especially handy when you are on vacation or in a situation that prevents you from watching your stocks for an extended period of time.

The disadvantage is that the stop price could be activated by a short-term fluctuation in a stock’s price. The key is picking a stop-loss percentage that allows a stock to fluctuate day-to-day while preventing as much downside risk as possible. Setting a 5% stop loss on a stock that has a history of fluctuating 10% or more in a week is not the best strategy. You’ll most likely just lose money on the commissions generated from the execution of your stop-loss orders.

There are no hard and fast rules for the level at which stops should be placed. This totally depends on your individual investing style: an active trader might use 5% while a long-term investor might choose 15%, or even more.

Trailing Stop Loss

So, you bought 1 ETH for 0.05 BTC, and set a stop-loss goal in the system at 10%, and take profit as 20%. The trailing stop loss feature will follow the price and moves the stop-loss after the price moves towards taking a profit.

Suppose the price for ETH increases by 10%, now your stop-loss will be rearranged as 0.0495 BTC. This way, even if the stop-loss order is triggered, you will earn profits.

So, Trailing stop loss is a feature that is intended to help traders lock in profits while protecting you from the day trading losses. It puts a limit or cap on the amount that will be lost if the trade doesn’t go well, but doesn’t limit the potential gain if the trade goes in your favor.

Features of Trailing stop loss order

Trailing stop loss orders are established to function automatically
Contrary to regular stop loss, a trailing stop loss moves according to changes in price
These orders also help in managing both risk and trade
Trailing stops move if the price moves favorably and once it moves to lock in a profit or reduce a loss, it doesn’t move back in the other direction

How trailing stop loss works?

A trailing stop loss order is initially placed in the same way as the stop-loss order. For example, the trailing stop for a long trade would be a sell order and would be placed at the time when the price reaches below the trade entry point.

The key difference between trailing stop loss and regular stop loss feature is that trailing order moves whenever the price moves in the trader’s favor. For example, for every 5% increase in the price, the trailing stop will also move up to 5%. And, if it moves to 10%, the stop loss will also move to 10%. But if the price starts falling, the stop loss will not move.

Let’s understand it with an example:

Say, you enter a long trade at $40, with a 10-cent trailing stop at $39.90. If the price moves up to $40.10, the trailing stop value will move to $40. And, at $40.20, it will move to $40.10.

And, here if the price moves back to $40.15, the trailing stop will remain the same, i.e. it will stay at $40.10. If the price falls down continuously and reached to $40.10, the trailing stop loss order will be triggered and would be converted into a market order. Here, you will exit the trade at $40.10, which means that you have protected 10 cents of profit per crypto asset.

Long Trade Trailing Stop Loss

Price	Price Movement	Trailing Stop Loss	Your Profit
$40	–	$39.90	–
Up	$40.10	$40.00	–
Up	$40.20	$40.10	–
Down	$40.15	$40.10	–
Down	$40.10	$40.10	–
$40.10	Exit	Null	$0.10

Trailing stop loss for a short trade

The scenario for a short trade is similar except that you are expecting the cryptocurrency price to drop, so the trailing stop-loss feature will be placed above the entry price.

Let’s say you are entering a short trade by selling a crypto asset at $40 per share. With a 10 cent trailing stop loss, you would be stopped out with a 10-cent loss if the price moves up to $40.10.

If the price drops down to $39.80, the stop loss will drop to $39.90. And, if the price increases to $39.85, the stop loss price will remain the same at $39.90.

And, if the price falls to $39.70, the stop loss will fall to $39.80. If the price increases to $39.80 or higher, the order will be converted into a market order and you will exit the trade with a gain of $20 per share.

Price	Price Movement	Trailing Stop Loss	Your Profit
$40	–	$40.10	–
Down	$39.80	$39.90	–
Up	$39.85	$39.90	–
Down	$39.70	$39.80	–
Up	$39.80	$39.80	–
$39.80	Exit	Null	$0.20

Limitations of Trailing Stop Loss

One major drawback of the trailing stop loss order is that that they can get you out from any trade very soon, such as if the price is pulling back a bit only, and not reversing actually.

To prevent such cases, make sure to place trailing stops at a distance from the current price that does not expect to reach unless the market changes its direction.

Another complaint about trailing stop loss order is that they don’t protect you from the major market moves which are greater than your stop position. If you set a stop order to prevent a 5% loss, but the market moves against you by 20%, the stop order will not help you because there won’t be any chance for your stop order to be triggered. And, here your market order will be filled near the 5% loss point.

A good trailing stop loss percentage is 15% or 20%, which works great with almost all the stocks.

The best alternative to trailing stop loss

The alternative to Trailing Stop Loss is the Trailing Stop Limit. How it is different?

Once the stop price is reached, the trade will be executed at the limit price which you have set or a better price.

Stop Limit

A Stop-Limit order is executed as a limit order within a specific price range (buy or sell limit price or better) and not as a market order. With a Stop-Limit order, the trader sets a stop price at which the order is triggered and a Limit price at which the order is executed. The order executes only between the Stop price and the Limit price as long as matching bids are available in the order book. If the market price exceeds the Limit price, the order may not be filled.

And, if it reaches at the stop price, the Limit order is triggered and it starts reflecting in the order book. The order does not get triggered until it reaches the set stop price. If the Stop price is reached, but the price doesn’t reach the Limit price, the order will not be executed.

Let’s understand this better with an example:

If a trader would like to buy BTC once the market price reaches $4000, but does not pay more than $4050, then a stop price of $4000 and a limit price of $4050 will be specified at the same time using a stop-limit order.

If the market price reaches $4000, the order is triggered and will match the best available bids up to $4050.

If the market price moves to $4050.01 or above, then the order may go partially unfilled due to the limit price.

Difference between trailing stop and trailing stop limit order

Trailing stop orders are kind of trailing stop market orders which behave exactly in the same way as the trailing stop limit until it reaches the trigger price.

After that, the trailing stop order sends a market order to exchange while the trailing stop limit places the limit order.

Trailing stop market order ensures that the order is fulfilled after it is triggered. This order feature is crucial when you are using a trailing order as stop loss or take profit. But in any condition, if the price moves sharply, there will be a risk that the order fills at a price which is higher or lower than the trigger price.

On the other hand, Trailing stop limit order fixes the price at which the order will be filled. But, if the price moves sharply past the limit price, there might be a chance that your order won’t be filled.

Let’s continue this with an example:

Position-1 BTC (Long)

Market BTC price =$11000

You have bought 1 BTC at $10,000, and are looking to take profit as the price has reached $11,000. However, you feel that the price could continue to increase and you don’t want to give up the potential advantage.

You are evaluating placing Trailing Stop sell Vs Trailing stop limit order

Trailing stop- sell 1 BTC at a trailing distance $100

Trailing stop limit- sell 1 BTC. Trailing distance $100

Initial order trigger will be set at $10,900

If the price of asset moved higher, the trigger will also move higher keeping at distance of $100. If the price falls, the trigger will remain the same. Order will be executed if the price falls to a level at which the trigger is set.

Post order

If the market rises to $11,200, and then falls immediately to $11,050, order trigger moves up to $11,100 and the order activates at $11,100 if the price falls sharply.

Result

Trailing stop – Market sell 1BTC order is sent to exchange when the price passes $11,100. It fulfills at an average price of $11,073

Trailing Stop limit- Limit sell 1 BTC at $11,100 or better order is sent to exchange if the price passes $11,100. The order doesn’t fill as the price is moving lower before the order is placed. The order remains in the order book at $11,100 and will be executed if the price reaches back to $11,100.

How to place Stop Loss Limit at Growlonix

Select Stop Loss order type.
Select Base and Quote coin.
- E.g. Market: BTC/LTC
Select the number of coins needs to be sold.
- E.g. 10 coins. (quantity could be in the fraction)
Now, click on the drop-down menu near Take Profit. It will pop up 3 options: Market, Limit, and Trailing. Selection of an option means when market price (ask price) rises to the Stop value, the selected order in the drop-down menu will be executed (Market Sell, Limit Sell or Trailing Sell).
- Example if the current ask price of LTC is 0.011189 BTC.
- Stop value can be a place at 0.011000, ~2% below the current price.
- Suppose market hit 0.011000. This will trigger subsequent order. Below are the possibilities:
  - Market Sell: A Market Sell order will be placed.
  - Limit Sell: A Limit Sell order will be placed having limit value mentioned during placing the order.
  - Trailing Stop Sell: A trailing Stop sell order will be placed with the mentioned offset during placing the order.

A hypothetical example:

Case 1 Stop Loss with Market Sell:
- Suppose the current ask price of ETH is $100. Now someone placed a Stop Loss with Market Sell order, for 1 ETH coin with stop value $90. Now when the ETH ask price dips less than or equal to $90, a Market Sell order will be placed.
Case 2 Stop Loss with Limit Sell:
- Suppose the current ask price of ETH is $100. Now someone placed a Stop Loss with Limit Sell order, for 1 ETH coin with stop value $90 and a Limit value $95. Now when the ETH ask price dips less than or equal to $90, a Limit Sell order will be placed at $95.
Case 3 Stop Loss with Trailing Stop Sell:
- Suppose the current ask price of ETH is $100. Now someone placed Stop Loss with Trailing Stop Sell order, for 1 ETH coin with stop value $90 and Trailing offset 5%. Now when the ETH ask price dip to less than or equal to $90, a Trailing Stop Sell order will be placed. Let’s say market bounce back again and reached to peak $116 and then start correcting. The time when the market reaches $112.5, a Market Sell order will be placed.

Conclusion

Ultimately, Trailing stop loss and Trailing stop-limit orders will give you the freedom to manage your risks during the unstable times of the crypto market. If you observe that the ordinary stop loss and stop limit orders only limit the specific amount of loss that you define while placing the order. But on the other side, placing trailing stop loss and stop limit orders will update your order values automatically to limit the maximum losses possible, and turn the whole trade profitable.

Trailing stop orders are intelligent and advanced as compared to stop orders. Growlonix is one of the best crypto trading bots to apply your knowledge on advanced order types like Trailing stop loss orders.