Trailing Stop-Loss
A sell order that has an adjusting activation trigger price linked to the current trading price.
This order type begins as a sell order - if however, prices rise, this execution price is constantly adjusting upwards but the order closes when the price falls beyond tolerable parameters, the delta.
The trigger price of the sell order can rise but never fall - the acceptable loss percentage remains constant even as the trade moves into profit. In this way, when a trader buys an asset and it rises, they will be able to benefit, locking in profits when possible, but minimizing the downside risk.
The main problem with this order type is that localized volatility spikes may be enough to trigger the execution price and thereby stop the user from benefiting from potential price appreciation. In other words, during periods of price appreciation trailing stop-loss order is ideally designed to benefit from that environment, it limits potential downside risk at the expense of being too cautious and potentially limiting upside gains.
How it is used
Marc is an experienced trader. While analyzing the markets, he has seen positive momentum in AXO, but would also like to exit his position when the market moves against him. He doesn’t want to just set a simple stop-loss for his trade, as this would mean that he cannot capture the profit that the upwards momentum might give him; instead, he chooses a trailing stop-loss order with a 5% delta to the trading price. This allows him to adjust his stop-loss trigger automatically. After this, the AXO price went up by 20% and his stop-loss price followed the upwards momentum, whereby the new stop-loss price was set at 19% above the deployment price. Through this method, Marc can capture a minimum of 19% profit, while having no ceiling as to what his profits could be.
If Marc would have set a normal stop-loss order at 5% of the deployment price, the stop-loss would have only activated when the price went down -5% of the original trade. On the other hand, with a single order, with the trailing stop-loss, he can capture a positive uptrend and lock in profits while still covering his downside.
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