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Trailing Stop Order: a definitive guide by Good Crypto app

Trailing Stop Order: a definitive guide by Good Crypto app

Trailing Stop orders are regarded as one of the best crypto trading tools and rightfully so. By mastering trailing stop orders you will become a much better crypto trader – and your P&L will thank you!

Whether you are looking to enter a position or close an existing one - а Trailing Stop order is there to help, allowing you to buy exactly when the downtrend reverses and sell after the uptrend runs out of steam.

Despite being available on most popular stock and forex trading platforms, from Thinkorswim to Robinhood, Trailing Stop is a rare sighting in crypto trading. At the moment, only four spot crypto exchanges (Bitfinex, Bitstamp, OKEx, and Liquid) and three derivatives exchanges (Bitmex, Binance Futures, and FTX) support Trailing Stop Market orders. ZERO crypto exchanges support Trailing Stop Limit orders. If you are trying to find Trailing Stop on Binance or Coinbase Pro – you are out of luck.

We at Good Crypto believe that every crypto trader should have the best trading tools at her disposal. That is why the Good Crypto app offers synthetic Trailing Stop Market and Trailing Stop Limit orders for every crypto exchange we support. You can use Trailing Stop orders whether you trade on Binance, Coinbase Pro, Kraken, Bittrex, or any of the other 25 (and counting) exchanges in the app.

Trailing Stop orders could be a bit overwhelming at first and take some time to get a hold of. In this post, we will guide you through all the nuts and bolts of trading with Trailing Stops. We will cover order mechanics, most common trading strategies, differences between Trailing Stop Market and Trailing Stop Limit orders, and even explore the use of the advanced Trailing Start feature available in Good Crypto app.

Trailing Stop order basics 

Trailing Stop order has a Stop (order trigger) that follows (trails) market price at a specified distance (Trailing Distance) when the price moves in the chosen direction, but remains in place when the price moves in the opposite direction. If the market price ‘touches’ the Stop, the underlying Market or Limit order is sent to the exchange.

Trailing Stop order basics

Trailing Distance for GC Trailing Stop orders can be set either as a % of the current price or as a hard number (e.g. $200)

Trailing Buy order follows market price as it goes down and triggers Buy order if/when the price rises from its low by the amount set as the Trailing Distance.

Trailing Sell order follows market price as it goes up and triggers Sell order if/when the price falls from its peak by the amount set as the Trailing Distance.

Example:

The current BTC price is $10,000 and you send a Trailing Sell order with a Trailing Distance of $100.

The initial order trigger (or Stop Price in traders’ parlance) will be set at ($10,000-$100) = $9,900.

If after you send the order BTC price falls to $9,900 – the order trigger will be reached and the Market Sell order will be sent to the exchange.

If the market price will fluctuate in the range of $9,900-$10,000 – between the order trigger and market price at the time the order was sent – nothing will change. The order will stay ‘dormant’, the order trigger will remain at $9,900 – at the distance of $100 from the market price at the time the order was sent.

If, however, the market price rises from $10,000 – order trigger will follow (trail) at the set distance of $100. Thus, if the price rises to $10,100 – the order trigger will move up to $10,000 to stay within the $100 distance. If the market price rises further to $10,200 – the trigger will move up to $10,100.

The order trigger will continue to rise with the market price but will remain in place if the price moves lower. If market price at any time falls enough to ‘touch’ the order trigger – it will fire, and the underlying order (Market or Limit) will be sent to the exchange.

Trailing Stop orders are a great tool to enter either a long or a short position at the exact moment the price trend reverses. This lets you enter at a better price by not going against the current price trend while also increasing the probability that the price will move in your favor after you enter the position.

Trailing Stops are also a perfect tool to exit your existing positions - Long or Short. They act as a Trailing Stop Loss and an open-ended Take Profit simultaneously - limiting your downside but letting your profitable trades run with the market, allowing you to capture larger profits and exit at the exact time the price trend starts to reverse.

PRO tip: Attach Take Profit and Stop Loss when entering a position with a Trailing Stop in Good Crypto app - you’d be amazed how powerful this trading setup is.

Trading strategy 1: Entering Long position with a Trailing Buy

Market: BTC price = $10,600.

Trading Idea: Bitcoin fell from $11,000 to $10,600 on the news of an investigation against one of the leading derivatives exchanges. You expect the price to go back up after a sharp decline, but worry that it might drop further before rebounding.

Order: Trailing Stop: Buy 1 BTC. Trailing Distance: 1%.

Initial order trigger is set at ($10,600+1%) = $10,706.

The order trigger will follow the market price: if it moves lower, the trigger will be moved lower respectively (to keep the distance of 1%). If the price rises, the trigger will remain in place. Order will be executed when the price rises to the level at which the order trigger is set.

Post-order:

Scenario 1: Market price goes further down to $10,400 before rebounding.

Result: your order executes at ($10,400+1%) = $10,504. You’ve entered the position at a lower price and by the time the price reaches $10,600 (where you’d have entered otherwise) you’ve already made a profit.

Scenario 2: Market price rises from $10,600 to $10,800.

Result: your order executes at ($10,600+1%) = 10,706. You’ve ‘missed’ the profit opportunity from $10,600 to $10,706 but entered on a strong uptrend while being protected in case Scenario 1 had come to life.

Scenario 3: Market price ‘flattens’ within the range of $10,550-10,650.

Result: your order tracks the market price and waits ‘till the price moves further up or down. At the same time, every price move below the $10,600 also moves the order trigger lower. When the price drops to $10,550 order trigger moves down to ($10,550+1%) = 10,655.6 and stays there. If the next large price move is down - effectively the Scenario 1 will play out. If the price breaks higher from here, an improved version of Scenario 2 will be realized - your order will be executed at $10,655.6.

 

You can also use Trailing Sell to establish a Short position - the logic is reversed compared to the Long + Trailing Buy example above.

Trading strategy 2: Exiting Long position with a Trailing Sell

Trailing Sell Order

Position: 1 BTC (long).

Market: BTC price = $10,600.

Trading Idea: You’ve established your position (bought 1 BTC) after Bitcoin fell from $11,000 to $10,600 on the news of an investigation against one of the leading derivatives exchanges. You expect the price to go back up after a sharp decline, but worry that it might drop further before rebounding.

Order: Trailing Stop: Sell 1 BTC. Trailing Distance: 1%.

Initial order trigger is set at ($10,600-1%) = $10,494.

The order trigger will follow the market price: if it moves higher, the trigger will be moved higher respectively (to keep the distance of 1%). If the price falls, the trigger will remain in place. Order will be executed when the price falls to the level at which the order trigger is set.

Post-order:

Scenario 1: Market price goes further down to $10,400 before rebounding.

Result: your order executes at ($10,600-1%) = $10,494. Your Trailing Sell order effectively acted as a Stop Loss with a distance of 1% from the entry price.

Scenario 2: Market price rises from $10,600 to $10,800.

Result: your order is still open, but the order trigger moved up to ($10,800-1%) = $10,692. Now, even if the market falls back, the worst price you’ll exit your position at is $10,692 guaranteeing you’ve made a profit. Basically, your ‘Trailing Stop Loss’ had just become a ‘Trailing Take Profit’.

Given that your order remains open if the market rallies further from here, the profit you’ll lock in by exiting your position will only increase.

Scenario 3: Market price ‘flattens’ within the range of $10,550-10,650.

Result: your order tracks the market price and waits ‘till the price moves further up or down. At the same time, every price move above the $10,600 also moves the order trigger higher. When the price rises to $10,650 order trigger moves up to ($10,650-1%) = 10,543.5 and stays there. If the next large price move is up - effectively the Scenario 2 will play out. If the price breaks out of the $10,550-$10,650 range to go further down, an improved version of Scenario 1 will be realized - your order will execute at $10,543.5 limiting your losses to less than 1%.

PRO tip: you could have avoided exiting at $10,494 in Scenario 1 above by setting the Trailing Distance at 2% or more. Larger Trailing Distance allows your order to ‘ignore’ short-term price fluctuations and avoid exiting at the ‘wrong’ moment but also increases your downside risk in case the price falls further. DYOR and set up your orders accordingly.

You can also use Trailing Buy to exit a Short position - the logic is reversed compared to the Long + Trailing Sell example above.

 

What is the difference between the Trailing Stop Market and Trailing Stop Limit orders? 

Trailing Stop orders are, in fact, Trailing Stop Market orders. They behave exactly in the same way as Trailing Stop Limit until the trigger price is reached. After that, the Trailing Stop order sends a Market order to the exchange, while Trailing Stop Limit places (you guessed it) a Limit order.

Trailing Stop (Market) order ensures that the order is filled immediately after it’s triggered. This order property is crucial when you use a Trailing order as a Stop Loss and/or Take Profit. However, if the price moves sharply, there is a risk that the order fills at a price that is higher/lower than the order trigger price.

Trailing Stop Limit order fixes the price at which the order will be filled. However, if the price moves sharply past the Limit price, there is a chance that your order won’t be filled and will ‘sit’ in the orderbook after it’s triggered.

Thus, the choice between the Trailing Stop (Market) and Trailing Stop Limit order is a tradeoff between the certainty of order execution vs. the certainty of the execution price.

Example:

Position: 1 BTC (long).

Market: BTC price = $11,000.

Trading Idea: You’ve established your position (bought 1 BTC) at $10,000 and are looking to take profit (sell 1 BTC) as the price has risen to $11,000. However, you feel the price could continue to climb in the near term and you don’t want to give up the potential upside.

You are evaluating placing a Trailing Stop Sell order vs. Trailing Stop Limit Sell order.

Order:

Trailing Stop: Sell 1 BTC. Trailing Distance: $100.

OR

Trailing Stop Limit: Sell 1 BTC. Trailing Distance: $100.

Initial order trigger will be set at ($11,000-$100) = $10,900.

The order trigger will follow the market price: if it moves higher, the trigger will be moved higher respectively (to keep the distance of $100). If the price falls, the trigger will remain in place. Order will be executed when the price falls to the level at which the order trigger is set.

Post-order:

Market price rises to $11,200 and then sharply falls to $11,050. Order trigger moves up to ($11,200-$100) = $11,100 and the order activates at $11,100 when the price sharply falls.

Trailing Stop Result: Market ‘Sell 1 BTC’ order is sent to exchange when the price passes $11,100 on the way down. It fully fills at the average price of $11,073.

Trailing Stop Limit Result: Limit ‘Sell 1 BTC at $11,100 or better’ order is sent to exchange when the price passes $11,100 on the way down. The order does not fill, as the price moves lower before the order is placed in the orderbook. The order remains in the orderbook at $11,100 and will be executed if/when the price bounces back to that level.

How to use the Trailing Start feature of the Trailing Stop orders in Good Crypto app?

Trailing Start for Trailing Buy Order

Trailing Start is the price level at which you want your Trailing Stop to be activated, i.e. to start trailing the market price. This field is optional. If you leave it blank your order will start trailing immediately after you send it.

Example:

if the current BTC price is $9,000 and you set Trailing Start at $10,000 your order will remain dormant until the market price rises to $10,000.

If you set Trailing Start at $8,000 the order will stay dormant until the market price falls to $8,000.

If you leave this field blank, the order will start trailing right away.

NB: Binance Futures only allows Trailing Start to be set at a better-than-market price

 

There are several use cases for the Trailing Start feature. Here are the two most common:

Use Case 1: range breakout

An instrument is trading within some range and you want your Trailing Stop to be placed when there is a breakout and/or a breakdown of the range. You set the Trailing Start to the top and/or down of the range you've identified.

Use Case 2: ‘attached’ Trailing Stop

You have an open order and you want your Trailing Stop to be placed after that order fills. You set the Trailing Start to the price level at which you expect your open order to be filled.

PRO TIP: you can also 'attach' a Trailing Stop on one exchange to an open order on another exchange

 

In this guide we have shown why Trailing Stop orders are one of the most powerful crypto trading tools out there and should be a part of every trader’s arsenal. Trailing Stops provide a great way to enter positions at the exact moment the price trend changes. They are also an invaluable tool for exiting your existing positions as they combine the properties of the Trailing Stop Loss and Trailing Take Profit in a single order – limiting your losses but allowing you to capture an unlimited upside.

Good Crypto app not only offers Trailing Stop Market and Trailing Stop Limit orders for 25 largest crypto exchanges, but also provides Trailing Start feature for Trailing Stop orders, and allows connecting fully-automated Stop Loss and/or Take Profit orders to every Trailing Stop order you send via the Good Crypto app.

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October 23, 2020

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