A Trailing Stop Order is a type of order designed to help traders protect profits while minimising potential losses. It automatically adjusts the stop price as the market price moves in a favourable direction, allowing traders to lock in profits as the price moves in their favour while offering protection if the market reverses.
How Does a Trailing Stop Order Work?
When you place a trailing stop order, you specify a trail amount, which is the distance between the current market price and the stop price. This can be set as either a fixed amount or a percentage of the market price.
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As the market price rises (for buy orders), the stop price also moves upward, maintaining the same distance (trail amount) from the market price.
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If the market price falls (for sell orders), the stop price stays at its last position and does not move up.
This means that the trailing stop allows you to lock in profits as the price moves favourably, but it will not trigger an order unless the price moves unfavourably by the amount you have specified in your trail.
Examples of a Trailing Stop Order
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Let's say you place a trailing stop order on an asset with a trail amount of £5.
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If the asset is currently trading at £50, your stop price would be set at £45.
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As the asset price increases, your stop price follows, remaining £5 below the market price.
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If the asset price moves to £60, your stop price would adjust to £55.
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If the price then begins to fall and reaches £55, your order is triggered, and the trade is executed at the best available market price.
Why Use a Trailing Stop Order?
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Profit Protection: It allows you to lock in profits as the market moves in your favour while automatically adjusting the stop price to protect those gains.
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Automatic Adjustment: You don’t need to manually adjust your stop price as the market moves, which can save time and reduce the risk of missing a key price movement.
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Risk Management: Trailing stop orders help protect against market reversals by triggering a sale once the market price reaches the stop price, preventing further losses.
Limitations of Trailing Stop Orders
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No Guarantee of Execution: If the market price gaps past the stop price, your order may not be executed at the desired level.
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Not Always Ideal for Volatile Markets: In fast-moving or highly volatile markets, the stop price may be triggered too early, leading to premature execution.
On the Kinesis platform, you can place a Trailing Stop Order from the Exchange tab.