Trailing Stop Order: Trading Strategy Tips when using Special Order Types
Trailing Stop Orders are one of the most useful tools in professional traders’ toolbox. A trailing stop order is simply an order which tracks the market price. It then submits a limit order at the given market price. This order is particularly useful to a trader with a low-risk profit taking strategy
In a nutshell, this order type basically allows you to “follow” the market direction with your investment. The longer the market keeps going in the direction you buy or sell into, the more profit you make. If it goes against you, the losses are minimized to the risk level you decide, before placing the trade. You minimise your losses, yet you still have the ability to take advantage of potential gains.
Example: Let us pretend that you buy 1BTC as an investment for R10 000. You believe in the whole “BITCOIN THING” but you cannot afford to lose more than R1 000 (10% of R10 000) because petrol prices are going up again and you need to adjust your budget. So now what you can do is take your 1 bitcoin and place a [SELL] stop order, with a price distance of R1 000 from the market price.
If the market price goes down and the BUY price drops to R9000, the stop order will trigger and automatically place a sell order. So you are safe and have limited your exposure to R1000 nett loss.
The Trailing Stop…
What if the bitcoin value keeps climbing? Your instict was right and the price is going up. Now, with a stop order, the triggering price is fixed (R9 000). In contrast, with a trailing stop limit, the trigger price will follow or track the market price. Furthermore, YOU decide the margin or distance from the market price. That means if the price of 1 BTC rises to R20 000, the trigger price will rise to R19 000.
What is the main advantage of using a trailing stop order?
With this strategy, you are taking a longer-term view on the market. Yet you are limiting your exposure should the market go the other way. This method allows a trader to ride the momentum of the currency whilst not having to keep an eye on the trade in case the market drastically moves in the opposite way. As a result, this is a great order type for beginners to try out. The reason for this is that this order allows you to remove “emotion” from your trade. To further explain, you are able to plan your trade and then “walk away” leaving the system to “ride the wave” for you.
Why is this used for low-risk trading strategies?
Like a stop-limit order, the trailing stop order is a tool to limit losses whilst leaving enough exposure to make a profit on trades whilst there is volatility in the market. Taking on exposure to a cryptocurrency asset class is risky and this order type is like buying insurance on a trading strategy.
Where can you use this strategy?
Advanced exchanges all over the world offer this type of functionality and iCE3X is the first exchange to offer this feature in South Africa. iCE3X has established itself as the leading trading platform in South Africa with more features, order types, and functionality than any other operator. We will be further extending this lead by enabling trailing stop limit order functionality on the exchange during November 2018. Make sure you sign up to our mailing list or follow us on social media to stay up to date.
When you trade cryptocurrency it can be risky yet also highly rewarding. Furthermore, trailing stop orders assist the trader to create and manage more advanced trading strategies.
Have you used a trailing stop order? Let us know your thoughts in the comments section below.