Trading Exit Strategies to Avoid Unintended Positions III

Exit Strategy Special – Trailing Stop/Trailing Profit

Investors always aim to buy low and sell high. However, price movement is unpredictable, especially the peak and trough. 

Pursuing Profit Maximization

Have you ever come across these thoughts?

“Shall I take profit now in case the price plunges?”

“What if the price continues to climb up after I take profit?”

“I’ve exited too early! There goes my profit!”

To combat greed and fear, traders should have well planned exit strategies. Besides placing take profit and stop loss orders at a predefined price level, traders may also consider using the Trailing Stop feature to capture the market movement.

Let’s recap how take profit and stop loss order work. Ann bought 100,000 long contracts at $10,000, setting her take profit at $10,200 and stop loss at $9,800. The position will close out if price moves for $200 in either direction. 

If a sudden news changes Ann’s market view and she becomes bullish about bitcoin price, she may want to raise her price target and manually adjust the $10,200 take profit price level.

Trailing Stop

Trailing stop fixes the trailing distance but not the stop loss price. The stop loss price target adjusts and modifies automatically as “the best market price after order placement” improves. Trailing Stop aims to secure the maximum profit while limit loss.

Returning to Ann’s scenario, Ann enters her BTCUSD long position at $10,000 and places a trailing stop order of $200.

  • If the BTC price declines after position entry, the best recorded market price remains at $10,000. The stop loss price will maintain at $9,800 and the loss is still capped at $200.
  • If the BTC price rises to $11,000, the stop loss price will increase as the best price increases (from $10,000 to $11,000). The stop loss price target will be $10,800 now and the trailing distance remains at $200.
  • If the BTC price moves as shown in the diagram above, declining to $9,900 right after position entry, the stop loss price remains at $9,800. After which, the price rises to $10,500, “the best price after order placement” increases by $500. At this point, the trailing stop price will increase by $500 as well to $10,300. If BTC price declines and the trailing stop kicks in, Ann has secured profit from $300 price distance (from $10,000).Now that the price continues to climb to $11,000, the trailing stop price will follow and gets reset to $10,800. It means that Ann has secured at least profit from $800 price distance (from $10,000).

To put it simply, the trailing stop feature will continuously increase (long position) or decrease (short position) the stop loss price as “the best market price after order placement” improves. Trailing stop won’t limit the upside profit potential but limit loss when price retraces.

Please note that a trailing stop order

  • Is a market order;
  • Trails the best market price after the trailing stop order is placed. If Ann places the trailing stop order when the market price is $9,900 (as in the diagram above), the best market price to trail is $9,900, and thus the initial stop loss price target is $9,700 instead of $9,800. 

Trailing Profit

You can apply an extra triggering condition where the Trailing Stop order is only activated when the position is in profit. In other words, Trailing Stop is only activated when it is “trailing profit”.

Revisiting Ann’s case, she enters a long position at $10,000. She finds the previous peak of $10,500 a strong resistance level. It may surge once breaking out, while it may also retrace significantly if it fails it.

Ann sets a trailing stop of $200 and applies a trigger condition of $10,500. It means this trailing stop order is invalid until the market price reaches $10,500. Once the market price hits $10,500, the trailing stop will be activated and stop loss price starts at $10,300. It will secure a profit of at least $300 price distance when triggered, and the stop loss price may further increase as the market increases.

Setting up Trailing Stop price distance and Trigger Price in the order tab.