Managing Open Positions with Trailing Stop Orders

A trailing stop order is a trading instrument designed to protect profits while maximizing potential gains as the market moves favorably. Unlike conventional static stop orders, a trailing stop dynamically follows price movements, allowing traders to secure profits without constantly monitoring the screen.

This feature is particularly useful when you are confident about the direction of price movement but unsure of how far the price will go, or when your busy schedule prevents real-time monitoring of open positions.

Two Ways to Set Up a Trailing Stop Order

Trailing stop orders are available in two mechanism variants. The first is percentage type, where your stop loss is set as a certain percentage below or above the highest market price. The second is fixed amount, which is a constant nominal value that separates your stop loss level from the peak market price.

You also have the flexibility to set an activation price that determines when the system begins tracking the market price to move your stop loss level.

How Percentage Trailing Stop Works

Let’s look at a practical scenario. Suppose the current asset price is $100 and you set a trailing stop order to sell with a 10% distance below the market price.

When the price drops 10% to $90, your order will be activated and immediately converted into a market order to sell.

However, if the price rises to $150 then drops 7% to $140, the trailing stop order will not be activated yet. The reason is simple: the trailing stop will only activate when the price drops 10% from its peak, which is at the $135 level.

Another scenario: the price reaches $200 then declines 10% to $180. At this point, your trailing stop order will be triggered and executed immediately at $180.

Fixed Nominal Trailing Stop Mechanism

Now, observe the fixed system. The initial price is $100 and you set a trailing stop order to sell with a difference of $30 below the market price.

If the price drops $30 from the entry point to $70, the order will be activated and executed.

If the price jumps to $150 then drops $20 to $130, the trailing stop order will not be activated because the stop loss level will move accordingly, staying at $120 ( below the market$30 .

When the price reaches $200 and then drops ) to $170, your order will be triggered and executed at that price.

Important Points to Note

There are several crucial points when using trailing stops. First, your position and margin will not be locked until the order is truly activated. Always ensure you maintain sufficient margin to avoid liquidation risks.

Second, a trailing stop may fail to activate due to various factors such as price restrictions, position limits, insufficient margin, account in non-trading mode, or technical disruptions. Even after activation, the resulting market order may not be fully executed, similar to regular market orders. Unfilled orders can be checked in the Open Orders menu.

By understanding the mechanism and limitations of trailing stops, you can incorporate this tool into your risk management strategy to protect profits more effectively.