Master trailing stop orders: automatic protection of your gains

What is a Trailing Stop Order?

A trailing stop order, also called trailing stop, is a strategic tool that allows traders to secure their profits without constant monitoring. This automated order continuously moves in accordance with market price movements, providing dynamic protection for your winning positions. Unlike fixed traditional stop orders set at a single level, the trailing stop adjusts gradually to preserve gains while allowing the price to move further upward.

Two modes of operation: percentage or fixed amount

The trailing stop can be configured using two different approaches. The percentage mode establishes a relative distance from the current price (example: keep a stop 8% below the price), while the fixed amount mode sets an absolute distance in dollars (example: $25 below the peak reached).

Percentage configuration: practical example

Suppose you buy a position at $100 and set a trailing stop order of 8% below the market price.

Scenario 1: The price immediately drops to $92. Your stop executes at $92 since the 8% decline has been reached.

Scenario 2: The price rises to $160 before falling back to $148. The order does not trigger yet because it waits for an 8% drop from the new peak ($148 < $147.20). Execution will only occur at $147.20.

Scenario 3: The price reaches $220 then drops back to $202. At this point, your trailing stop activates and sells at the market price of $202, securing most of your profit.

Fixed amount configuration: practical example

Let’s take an initial position of $100 with a trailing stop set at $28 below the market price.

Scenario 1: The price plunges to $72 (distance of $28). Your order executes immediately at $72.

Scenario 2: The price rises to $170 then drops by $22 to $148. The order does not activate because it requires a $28 decline from the peak ($142 instead of $148).

Scenario 3: The price climbs to $240, then recedes by $28 to $212. The order triggers at $212, crystallizing a substantial gain.

Key points to remember

Resource locking: Your assets and margin remain locked during the activation of the trailing stop. Ensure beforehand that you have sufficient position to avoid margin calls.

Conditions for non-execution: A trailing stop may fail to execute due to price constraints, insufficient positions, limited available margin, restricted account status, or technical malfunctions. Once triggered, its execution at market price depends on normal market conditions, just like a regular order. Unfilled orders appear in your Open Orders section.

When to use a trailing stop?

The trailing stop is especially useful when a position is moving favorably but you cannot monitor the market in real-time. It allows capturing additional gains while maintaining a defined loss limit, offering a balance between ambition and caution.