Understanding Trailing Stop Orders: Smart Profit Protection

A trailing stop order is a sophisticated mechanism that allows traders to protect gains and optimize open positions automatically. Unlike traditional stop orders, it dynamically adjusts as the price moves, automatically triggering a sale when the asset retraces a predefined percentage or absolute value from its peak price.

This type of order is particularly valuable when you cannot constantly monitor the market or want to capture maximum gains without risking significant losses.

Two Approaches: Percentage vs. Fixed Value

Percentage-Based Trailing Stop

Consider the following scenario: the current price is $100, and you set a trailing stop order to sell 10% below the quoted price.

How it works in practice:

• Immediate retracement: If the price drops to $90 (10% drop), the trailing stop is triggered and the sale is executed at the market price.

• Upward movement without trigger: If the price rises to $150 and then retraces only 7% (reaching $140), the trigger does not activate. The reason is simple: the trigger level is now at $135 (10% below the new maximum of $150).

• Trigger at new high: If the price rises to $200 and falls 10%, the trailing stop is triggered at $180, capturing much of the gain.

Fixed Dollar Value Trailing Stop

Now imagine a scenario where you set a trailing stop at $30 below the current price, starting at $100.

See how it works:

• Drop to trigger level: If the price falls to $70, the trailing stop is activated ($30 below the initial $100).

• Lateral movement without execution: Price rises to $150, then recedes to $130 ($20 drop). In this case, no trigger occurs, as the level now is $120 ($30 below the new peak of $150).

• Execution at new maximum: When the price reaches $200 and then drops $30 to $170, the trailing stop is triggered and the order is filled.

Key Points for Traders

About positions and margin:

• Your assets and margins are not frozen while the trailing stop is active. Ensure you have sufficient balance to maintain the position until the trigger occurs.

Limitations and failure scenarios:

• A trailing stop order may not trigger in situations of price restrictions, position limits, or insufficient margin.
• After triggering, the generated market order may not be fully executed under extreme volatility.
• Unfilled orders will remain visible in the open positions section.

Why Use a Trailing Stop?

This mechanism is especially useful for traders who want to maintain upside exposure while establishing an automatic floor for protection. Unlike a fixed stop, it “follows” the price upward, ensuring you do not sell prematurely in a strong uptrend.