Trailing Stop Concept
Trailing stop is an important tool for those looking to optimize the time and execution of purchase and sale orders, avoiding the need to constantly monitor the market.
How Trailing Stop Differs from Stop Limit
The main difference between a trailing stop and a stop limit is the flexibility it offers. With a stop limit, you set a fixed value for the buy or sell order, and when the price hits that value, the order is executed. With a trailing stop, you set a percentage variation, which allows the order to follow the market movement, adjusting as the price rises. The order is not triggered immediately if the price falls, which makes a trailing stop a useful option for those looking to maximize profits in volatile markets, allowing you to enjoy gains while the market moves in your favor, but without the need to constantly monitor the trade.
Practical Example
Let’s say you want to buy crypto $BIO at $0.65 or less and decide to use a trailing stop with a 2% margin. Here’s what happens:
1. Definition of Order:
• You place an order to buy $BIO with a price of $0.65 and a 2% margin. This means that if the asset price drops to $0.65, the order will be triggered and will start to be monitored.
2. Market Movement:
• The price drops to $0.62, which becomes the new limit. However, since the trailing stop is set to react only to upward movements, the order is not executed yet.
• The price rises again to $0.6324, making a 2% change from the new limit of $0.62. At this point, the buy order is automatically executed. This is because the price has risen enough to trigger the 2% margin call.
Conclusion
Trailing stops are a powerful tool for managing trades, especially in volatile markets like crypto. They allow you to maximize your profits when the market moves in your favor, but at the same time protect your trade from unexpected drops without having to constantly monitor prices. It is an automation strategy that can optimize your trading time, allowing you to take advantage of market opportunities more effectively.
Note: It is always advisable to fully understand how any tool works before using it in real trading, especially if you are a beginner. Binance, for example, offers educational support and a detailed explanation of trailing stops on its platform, which can help reinforce your learning.
