The recent turbulence in the crypto trading market has led to high volatility and a larger drawdown in equity prices.

That's why it has become more important for traders to incorporate several risk management tools into trading systems to avert significant losses.

And, using trailing stops is one such trading strategy which is getting highly popular among traders to provide downside protection. Usually, a trailing stop order is placed on an open position, at a specified distance (Trailing Distance) from the current market price of an asset.

The main purpose of the trailing stop order is to lock in the potential losses. If the market keeps moving in the favorable direction, so does the trailing stop while maintaining the stop loss at a pre-specified distance from the current rate of an asset.

Trailing Stop

Trailing Stop is a special kind of trade order which moves as per the rate fluctuations in the market.

When the market moves up, it drags the trailing stop along with it. But if the price stops moving up, the stop loss remains the same. So, this order strategy allows a trade to earn profits whenever the market rate moves up in a favorable direction, but it closes the trade automatically if the market amount suddenly moves in an unfavorable direction by a specified distance.

Keep in mind that short-term fluctuations in the asset's price can trigger a trailing stop order sometimes. The trailing distance in the trailing stop order can be set either as a percentage or a value. Whenever you are using a percentage for the trailing amount, the actual point spread between the current rate and the trigger price will vary as the trigger is recalculated.

Trailing stop buy order follows the market as it goes down and it triggers the buy order if the price rises from its low by the amount or percentage set as a trailing distance. On the other side, Trailing stop sell follows the market rate as it goes up and triggers a sell order if or when the amount falls from its current high by the amount set as the trailing distance.

Let's understand this with an example:

Suppose the current price an asset ABC is $10,000, and you place a trailing sell order with a trailing distance of $100. The initial trigger will be set as $10,000-$100= $9900.

If the rate of ABC reaches $9900, the order will be triggered and the market sell order is executed.
But if the price is fluctuating in the range of $9900 and $10000, nothing will change. The order will stay dormant and the order trigger will remain at $9900. And, if the market rises from $10,000, the order trigger will follow the trail of $100. Thus, if price reaches to $10,100, the order trigger will move to $10000 and further if price reaches to $10500, the trigger will move up to $10,400.

The order trigger will continue to rise with the market price of the asset, but remain in place if the price moves lower. And, if the market price of an asset falls enough to touch the order trigger, a market order will be sent to the exchange.

Trailing stop orders are great tools to enter or exit a position.

Trailing Stop Buy/sell

Every crypto trader must have the best trading strategies at their disposal so as to ensure profits.

And, using Trailing stop buy or sell order will make you earn more. While trailing stop sell order follows the market price as it goes up and triggers a sell order if or whenever the price falls from its peak by the amount set as the trailing distance, the trailing buy order is just the reverse of this.

A Trailing Stop Buy order follows the market price as the asset price moves down, and triggers a buy order if or when the price rises from its low by the amount set as the trailing distance. As the price of the crypto asset falls, the order trigger price is adjusted so that it is never more than a specified value or trail from the market price but if the price increases, the trigger price doesn't change.

And, the asset will be purchased at the best price.

Example:

You want to buy ETH, but you think that its price may fall in value soon. Now, you want to wait for some time to buy the asset. On the other side, you also think that if the price for ETH moves up by a defined amount, say 5%, it may even move higher.

So, to minimize the potential costs, you can set the trail to 5%. Here, your stop price will always remain 5% above the lowest price of ETH. This is all about placing a Trailing stop buy order.

Using Trailing Stop with trading bots

Using the crypto trading bot allows you to delay your buy and track the current market trends.

The bot will keep monitoring the rate as the price of the asset moves down until its starts to move up again to reachjll the set percentage. When it goes up, it will initiate a buy order. After that, your bot will use the trailing stop buy order if it gets the signal.

Apart from the huge benefits of using trailing stop orders, there are some drawbacks to consider. Make sure to choose the trailing stop amount carefully if you are investing in a volatile currency pair. Additionally, excessive trading may lead to higher commission charges eating into your profits.