Trailing Stop Loss Orders – Tips for Advanced Crypto Traders

If you’re looking for an indispensable ally in popular trading strategies like Dollar-Cost Averaging (DCA) and "Buy the Dip”, then you should take a closer look at Trailing Stop Loss. This powerful tool automatically adjusts to market movements and offers a sophisticated way to stay ahead of the curve, ensuring that you can maximize gains while safeguarding your investments. 

Read below to explore the mechanics of trailing stop loss orders, their benefits and limitations, and advanced tips for seasoned traders looking to optimize their use.

What Are Trailing Stop Loss Orders

A trailing stop loss order is a great tool for a dynamic strategy that allows traders to lock in profits while protecting against potential losses. Unlike a traditional stop loss order that remains fixed, a trailing stop loss adjusts with the asset’s price movement.

However, if the price starts to fall, the stop loss doesn't move, and if the market price hits the stop loss level, the order is executed. The beauty of this strategy lies in its flexibility; it allows traders to continue to gain from a rising market while protecting them from sudden downturns.

How It Works

When you set a trailing stop loss, you specify a trailing amount, which can be a percentage or a fixed dollar amount. As the asset’s price moves in your favor, the stop price moves with it. However, if the price starts to move against you, the stop price remains at its last position. If the asset's price reaches the stop price, a market order is triggered, selling the asset to prevent further losses.

Example

Let's say you buy Bitcoin at $30,000 and set a trailing stop loss of $1,000. If Bitcoin rises to $32,000, the trailing stop moves to $31,000. If the price then drops to $31,000, your position is sold, locking in a $1,000 profit. If the price continues to rise to $35,000, the stop loss will adjust to $34,000, protecting more of your gains.

Benefits of Trailing Stop Loss Orders

1. Save time

Trailing stop loss orders protect your profits without having to constantly monitor the market. 

2. Limit losses

By setting a trailing stop loss, you can limit their potential losses if the market moves against them. This automated approach helps maintain discipline and prevents emotional decision-making.

3. Stay flexible with your strategy

Trailing stop loss orders offer flexibility by allowing you to adjust the trailing amount according to market conditions and your risk tolerance. This adaptability can enhance trading strategies and improve overall performance.

Disadvantages of Trailing Stop Loss Orders

1. Premature exits

In highly volatile markets, trailing stop losses can be triggered by short-term price fluctuations, leading to premature exits. This can result in missed opportunities for further gains if the price rebounds quickly.

2. Execution risks

Trailing stop losses rely on market orders, which may not always execute at the desired stop price, especially in fast-moving markets. Slippage can occur, causing trades to be executed at a less favorable price.

3. Over-Reliance

Relying solely on trailing stop losses can lead to complacency. You should combine them with other risk management tools and strategies to ensure comprehensive protection.

Trailing Stop Loss for a Short Trade vs A Long Trade

In crypto trading, a Trailing Stop Loss for a short trade and a Trailing Stop Loss for a long trade serve similar purposes but operate in opposite directions due to the nature of the positions. 

For a long trade, a Trailing Stop Loss is set below the current market price and "trails" upward as the price increases. 

This means if you buy a cryptocurrency at $50 and set a trailing stop loss at 10%, the stop price will start at $45 (10% below $50). As the price rises, say to $60, the stop price will adjust to $54 (10% below $60). If the market price then drops to $54, the trailing stop will trigger a sell order, protecting your gains by locking in profits when the market reverses.

For a short trade, a Trailing Stop Loss is set above the current market price and "trails" downward as the price decreases. 

If you short a cryptocurrency at $50 and set a trailing stop loss at 10%, the stop price will initially be $55 (10% above $50). As the price drops, say to $40, the stop price will adjust to $44 (10% above $40). If the market price then rises to $44, the trailing stop will trigger a buy order to close the short position, thereby protecting profits from the short trade. In both cases, the trailing stop loss mechanism is designed to optimize the exit strategy by securing profits as the market moves favorably while providing a safeguard against sudden market reversals.

Advanced Tips for Using Trailing Stop Loss Orders

1. Adjust the trailing amount

The trailing amount is crucial in determining how closely the stop price follows the asset's price. For highly volatile assets, a larger trailing amount might be necessary to avoid being stopped out by minor price fluctuations. Conversely, for less volatile assets, a smaller trailing amount can help lock in gains more tightly.

2. Combine technical analysis

Trailing stop loss orders can be combined with other trading strategies for enhanced results, like integrating technical analysis. Indicators like moving averages, Bollinger Bands, and Relative Strength Index (RSI) can provide insights into optimal trailing amounts and help set strategic entry and exit points.

3. Use multiple trailing stops

Using multiple trailing stops can help manage risk more effectively. For example, you might set one trailing stop closer to the current price to lock in short-term gains and another farther away to protect long-term profits.

However, your balance is only used when the trailing stop order begins to move up. At that point, the funds are reserved while the price ascends. When the price reverses and hits the stop limit, the order is triggered, and the coins are sold.

Therefore, you should be cautious not to place multiple trailing stop limit orders that could exceed the available balance of your base currency.

4. Monitor market conditions

Staying informed about market conditions and news events is critical for advanced traders. Sudden market movements caused by news or other external factors can affect the performance of trailing stop loss orders. Being aware of such events allows you to adjust your strategies accordingly.

5. Customize for different assets

Cryptocurrencies differ significantly in terms of volatility and liquidity. If you’re an advanced trader, you can customize your trailing stop loss strategies for each asset, considering factors like trading volume, historical price patterns, and overall market sentiment.

Save time with Trading Presets

You can use Altrady's Trading Presets which allows you to save your carefully designed strategies and quickly apply them across various markets, removing the hassle of repetitive setup and configuration for each trade. The Trading Presets feature addresses this need by enabling users to deploy their frequent setups in seconds. This feature is transformative for traders whose strategies involve placing numerous similar orders.

Simply create and save frequently used trading configurations, such as order types, and quantities, take profit targets and stop loss points. You can link hotkeys to your presets for rapid application across various markets. A few keystrokes enable you to place orders instantly.

This feature allows you to carry out routine setups in seconds, streamlining your trading decisions and boosting profit potential.

You should regularly review your trailing stop loss orders to ensure they align with your current trading strategy and market conditions. Adjust them as necessary to ensure they continue to serve your investment goals.

6. Backtest strategies

Backtesting trailing stop loss strategies using historical data can help you understand their effectiveness in different market conditions. This practice allows you to refine your approaches and develop more robust strategies.

For instance, the percentage you choose for the trailing stop loss order can significantly impact its effectiveness. Set it too tight, and you might be stopped out of your position prematurely due to normal market volatility. Set it too wide, and you might not adequately protect your profits. It's a delicate balance that requires understanding the volatility of the cryptocurrency you're trading.

7. Leverage automation and a trading platform like Altrady

Automation tools and trading bots can help implement trailing stop loss strategies more efficiently. With Altrady, you can execute orders based on predefined criteria, reducing the need for constant monitoring and allowing you to focus on other aspects of your strategy.

You can set the trigger price – the price point where the trailing stop loss becomes active (at or above the initial purchase price). When this price is hit, the trailing stop loss begins its function, locking in profits as the price continues to rise.

You can also choose the distance between the trigger price and the stop price where the trailing stop loss starts and follows. It can be defined as a percentage or adjust it by simply by moving the stop loss distance handle on the chart.

Key Takeaways

Trailing stop loss orders are powerful tools for managing risk and protecting profits in cryptocurrency trading. 

Keep in mind that:

• A trailing stop loss is set at a certain distance from the market price and trails it as it moves up. 
• Stay informed about market conditions, news, and technological advancements that could affect your trading decisions.
• Even with trailing stop loss orders, it's essential to practice sound risk management.

Adjusting the trailing amount, combining technical analysis, and leveraging automation can further enhance their effectiveness.