Trailing Stop-Loss and Take-Profit Instructions
What is a Trailing Stop-Loss and Take-Profit?
A trailing stop-loss and take-profit allows users to pre-set orders within a specific percentage range of the market price during market fluctuations. When the market moves in the direction the trader believes is favorable and then reverses, it helps the trader limit losses and protect profits.
As the price moves in the favorable direction, the trailing stop-loss and take-profit will move by a specific percentage. As long as the price moves in the trader's favor, it keeps the trade open and allows for continued profit-taking to lock in gains. A trailing stop-loss and take-profit will not move in the opposite direction.
How is a Trailing Stop-Loss and Take-Profit Executed?
A trailing stop-loss and take-profit is only used to close existing positions.
In the case of long positions, the activation price must be higher than the latest market price. When the latest market price triggers the activation price, the trailing stop-loss price rises by a specific percentage. That is, when the market price rises after the order is triggered, the trailing stop-loss price also rises, forming a new trailing stop-loss price. When the price falls, the trailing stop-loss will stop tracking. If the latest traded price falls from the highest price by more than the predetermined retracement range and reaches the latest trailing stop-loss/take-profit price, the position is immediately closed by selling at the market price.
Similarly, for short positions, the activation price must be lower than the latest market price. When the latest market price triggers the activation price, the trailing stop-loss/take-profit price falls by a specific percentage. That is, when the market price falls after the order is triggered, the trailing stop-loss/take-profit price also falls, forming a new trailing stop-loss/take-profit price. When the price rises, the trailing stop-loss/take-profit will stop tracking. If the latest traded price rises from the lowest price by more than the predetermined retracement range and reaches the latest trailing stop-loss/take-profit price, the position is immediately closed by buying at the market price.
A trailing stop-loss/take-profit order must meet two conditions: both the activation price must be triggered and the preset retracement rate must be reached before it can be executed as a market order and sent to the market for execution.
How to set a trailing stop-loss/take-profit order?
1. Trigger Conditions: A trailing stop-loss order must meet both of the following conditions simultaneously.
**Long Position Trailing Stop-Loss Order Closing Conditions:**
Activation price triggered by market price
Rebound amplitude ≥ retracement rate
**Short Position Trailing Stop-Loss Order Closing Conditions:**
Activation price triggered by market price
Rebound amplitude ≥ retracement rate
2. Retracement Rate
The retracement rate determines the specific price at which the trailing stop-loss order tracks the latest transaction price. The retracement rate ranges from 0.1% to 99%. Users can manually adjust the retracement rate or select quick options such as "5%", "10%", etc.
3. Activation Price
Users can manually enter the activation price to trigger the trailing stop-loss order or select the latest market price to trigger it directly.
When setting a long position trailing stop-loss order, the activation price must be higher than the current latest market price. Conversely, when placing a trailing stop-loss order to close a position with no open positions, the activation price must be lower than the current market price.
The highest/lowest market price must reach or exceed the activation price to meet the trigger condition.
4. Triggering the Order
Triggered by the latest market price
5. Order executed at market price
Long-position trailing stop-loss closing: When the market price rises and then falls, and the pullback is greater than or equal to the set retracement rate, the order is executed at the latest market price.
No-position trailing stop-loss closing: When the market price falls and then rises, and the rise is greater than or equal to the set retracement rate, the order is executed at the latest market price.
Important Note
Setting the optimal retracement rate and activation price is very difficult.
For a trailing stop-loss to function properly, the retracement rate should not be too small or too large; similarly, the activation price should not be too close to or too far from the current price. When the retracement rate is too small, or the activation price is too close to the current price, the trailing stop-loss/take-profit order is too close to the entry price and may be triggered by normal market fluctuations before the market price has had a chance to change significantly in a way that benefits the trader. The order might be triggered/closed when the market price fluctuates only slightly, resulting in a loss when the market price recovers.
However, if the retracement rate is too large, the trailing stop-loss/take-profit order will only be triggered in extreme market conditions, meaning the user risks unnecessary and substantial losses.
In cases of significant market volatility, a higher retracement rate is a better choice, while a lower retracement rate is more suitable for normal market conditions.
There is no ideal optimal retracement rate or activation price. We recommend that users adjust their trailing stop-loss/take-profit order strategies promptly based on changing market conditions. When placing orders, users should consider their risk tolerance, investment experience, financial capacity, and other important factors. When determining the retracement rate and activation price, in addition to the magnitude of price changes, users should carefully consider their profit targets and loss tolerance.
Why Use Trailing Stop-Loss and Take-Profit Orders:
Purpose: When the highest or lowest price cannot be confirmed, and closing a position at the highest/lowest point cannot be guaranteed for profit, the goal is to maximize profit while ensuring profitability.
Limitations: It's impossible to monitor the market 24/7.
Other Advantages: Compared to regular stop-loss and take-profit orders, users don't need to frequently adjust the stop-loss and take-profit prices based on market conditions after placing an order to maximize profits.
Example:
Closing a long position on a favorable market trend:
Current Position: 1 BTC Long Position
Opening Price: 30000
Latest Market Price: 31000
Based on the current market price, the expected unrealized gross profit is (31000 - 30000) * 1 = 1000 USDT
Known Information: Recent market trends show that after each upward move, there is a pullback of no more than 3%. If we make the following prediction: In the recent market, pullbacks within 3% can be considered normal, and the market will continue to rise; if the pullback exceeds a certain value (let's assume 5%), it's considered the end of the bullish trend (the price rise has ended, and a sharp drop is imminent). Positions need to be closed before the market price crashes.
Setting a trailing stop-loss and take-profit order as follows:
Activation price: 32000
Pullback rate: 5%
At this point, as long as the latest market price continues to rise to 32000, the trailing stop-loss and take-profit order will trigger the tracking price. During the subsequent market rise, when the system receives a 5% price pullback, the system will automatically close the position at the market price.
Assume the market price triggers a move to 32000 and continues to rise, reaching 35000.
At this point, the trailing stop-loss price also climbs to 35000 * (1-5%) = 33250.
However, after reaching 35000, the market fails to continue rising and begins to fall back. Since the trailing stop-loss price remains unchanged when the market moves in a negative direction, the trailing stop-loss price remains at 33250.
If the market price falls from 35000 to 33300 and then resumes rising, the trailing stop-loss order will not be executed because the pullback has not reached 5%.
If the market price falls from 35000 to 33250 or below, the system automatically executes a trailing stop-loss order, which is closed at 33250.
That is, the execution price is 33250, with a stop-loss at the highest point of 35000, but a profit compared to the opening price of 30000.
Users can close their positions and exit the market before anticipating a significant drop. This approach ensures and relatively maximizes profits. If the market continues to rise without a significant pullback, the position will remain open and continue to generate unrealized profits.
When closing a position on a bullish market:
Current Position: 1 BTC (empty)
Opening Price: 30000
Latest Market Price: 29000
Therefore, based on the current market price, the expected unrealized gross profit is (30000 - 29000) * 1 = 1000U.
Given: Based on recent market trends, each decline is followed by a pullback of no more than 3%. Therefore, the following prediction can be made: In the recent market, pullbacks within 3% can be considered normal, and the market will continue to fall; if the pullback exceeds a certain value (let's assume it's 5%), it's considered the end of the bearish trend (the price decline has ended, and a surge is imminent). The position should be closed before the market price surges.
Set the trailing stop-loss and take-profit order as follows:
Activation Price: 28000
Pullback Rate: 5%
If the latest market price continues to fall to 28000, the trailing stop-loss and take-profit order will be triggered. During the subsequent price decline, when the system receives a 5% price pullback, it will automatically close the position at the market price.
Assume the market price triggers a drop to 28000 and continues to fall, reaching 27000.
At this point, the trailing stop-loss price also continues to fall, adjusting to 27000 * (1 + 5%) = 28350.
However, after reaching 27000, the market does not continue to fall but begins to rebound. Since the trailing stop-loss price does not change when the market moves in a negative direction, the trailing stop-loss price remains at 28350.
If the market price rebounds from 27000 to 28000 and then starts to fall again, the trailing stop-loss order will not be executed because the pullback has not reached 5%.
If the market price rebounds from 27000 to 28350 or higher, the system automatically executes a trailing stop-loss order, which is closed at 28350.
That is, the execution price is 28350, with a stop-loss at the lowest point of 27000, but a profit compared to the opening price of 30000.
Users can close their positions and exit the market in time before anticipating a significant upward move. This approach ensures and maximizes potential profits. If the market continues to rise without a significant pullback, the position will remain open and continue to generate unrealized profits.
Long position currently showing losses:
Current holdings: 1 BTC long position
Opening price: 30000
Latest market price: 25000
Based on the current market price, the estimated unrealized gross loss is (30000 - 25000) * 1 = 5000 USDT
However, given the possibility of a market rebound, it's uncertain whether it will recover to a profitable level.
Setting a trailing stop-loss and take-profit order as follows:
Activation price: 28000
Pullback rate: 5%
If the latest market price rises to 28000, the trailing stop-loss and take-profit order will trigger, and during the subsequent price increase, when the system receives a 5% price pullback, it will automatically close the position at market price.
Assume the market price triggers a move to 28000 and continues to rise, reaching 28500.
At this point, the trailing stop-loss price also rises and adjusts to 28500 * (1-5%) = 27075.
However, after reaching 28500, the market fails to continue rising and begins to fall back. Since the trailing stop-loss price remains unchanged when the market moves in a negative direction, the trailing stop-loss price remains at 27075.
If the market price falls from 28500 to 28000 and then resumes rising, the trailing stop-loss order will not be executed because the pullback has not reached 5%.
If the market price falls from 28500 to 27075 or below, the system automatically executes a trailing stop-loss order, which is closed at 27075.
That is, the execution price of 27075 represents a stop-loss compared to the opening price of 30000, but a profit compared to the lowest market price of 25000 after the opening.
Situation of loss despite being out of the market:
Current position: 1 BTC (out of the market)
Opening price: 30000
Latest market price: 35000
Based on the current market price, the estimated unrealized gross loss is (35000 - 30000) * 1 = 5000 USDT.
However, since the market is currently declining, it's uncertain whether it will fall back to a profitable level.
Setting a trailing stop-loss and take-profit order as follows:
Activation price: 32000
Pullback rate: 5%
At this point, as long as the latest market price falls back to 32000, the trailing stop-loss and take-profit order will trigger the price tracking. During the subsequent market decline, when the system receives a 5% price pullback, it will automatically close the position at market price.
Assume the market price triggers a drop to 32000 and continues to fall, reaching 31000.
At this point, the trailing stop-loss price also rises to 31000 * (1 + 5%) = 32550.
However, after reaching 31000, the market does not continue to fall but begins to rebound. Since the trailing stop-loss price does not change when the market moves in a negative direction, the trailing stop-loss price remains at 32550.
If the market price rebounds from 31000 to 31500 and then starts to fall again, the trailing stop-loss order will not be executed because the pullback has not reached 5%.
If the market price rebounds from 31000 to 32550 or higher, the system automatically executes a trailing stop-loss order, which is closed at 32550.
That is, the execution price of 32550 represents a stop-loss compared to the opening price of 30000, but a profit compared to the highest market price of 35000 after the opening.
Latest Price Activation Status
Current Position: 1 BTC Long Position
Opening Price: 30000
Latest Market Price: 31000
Activation Price Setting: Activated at the latest price
Pullback Rate: 5%
After the planned order is placed, it is immediately triggered at the latest market price of 31000.
When the market price rises from 31000 to 35000, the trailing stop-loss price also adjusts upwards to 35000*(1-5%) = 33250.
However, after 35000, the market does not continue to rise and begins to fall back. Since the trailing stop-loss price does not change when the market moves in a negative direction, the trailing stop-loss price remains at 33250.
If the market price falls from 35000 to 34000 and then starts to rise again, the trailing stop-loss order will not be executed because the pullback has not reached 5%. If the market price falls from 35000 to 33250 or below, the system will automatically place a trailing stop-loss order, which will be executed at 33250 to close the position.
That is, the execution price of 33250 represents a stop-loss compared to the highest price of 35000, but a profit compared to the opening price of 30000.
Simultaneously set both trailing stop-loss and regular stop-loss orders:
Current Position: 1 BTC Long Position
Entry Price: 30000
Latest Market Price: 30050
Latest Market Price Activated
Pullback Rate: 5%
Regular Stop-Loss Price: 28500
When the market price rises to 30060, the trailing stop-loss price will be 30060 * (1-5%) = 28557.
If the market price continues to fall from 30060 to 28557, the trailing stop-loss will be triggered and executed at 28557, and the regular stop-loss order will be automatically canceled.
Current Position: 1 BTC Long Position
Entry Price: 30000
Latest Market Price: 30050
Latest Market Price Activated
Pullback Rate: 5%
Standard Stop-Loss Price: 29000
When the market price rises to 30060, the trailing stop-loss price is 30060 * (1-5%) = 28557
If the market price continues to fall from 30060 to below 29000, the standard stop-loss at 29000 will be triggered first, and the trailing stop-loss order will be automatically cancelled.
Terminology Explanation:
Pullback: A financial term referring to the slight price retracement after each price increase/decrease, followed by a correction before another increase/decrease.
Pullback Rate: The ratio of the highest/lowest price to the current price.
Close Long Position -- Price drop from the highest point (highest - current) / highest
Open Short -- Price rebound from the lowest point (current - lowest) / lowest