What is a Trailing Stop Order?
Trailing stop orders allow you to preset an order within a certain percentage range of the market price to be executed when the market becomes volatile. When the market trends in a direction that is favourable for traders, using this strategy can help you lock in profits and avoid losses.
When the market begins to trend in a favourable direction, the trailing stop order will move along with the change in price, trailing the price of the asset by a certain percentage. As long as the market keeps trending in the same direction, you can keep your trade open to keep making and locking in profits. A trailing stop order will only move in one direction. If the market price moves in the opposite direction by a certain percentage, the trailing stop order will be triggered and the position will either be exited at the market price or your trade will be closed.
How are Trailing Stop Orders executed?
Although uncommon, you can set a trailing stop order as soon as you open a position. You can also set a trailing stop order as a reduce-only order, which only allows you to reduce or close an open position .
When you set a trailing stop sell order for a long trade, make sure the activation price is higher than the last transaction price. The price of the trailing stop order will increase by a certain percentage. When the price of the asset goes up, the activation price of the trailing stop order will also go up, resulting in a new trailing stop order price. When the price of the asset goes down, the price of the trailing stop order will not move. If the last transaction price exceeds the preset rate of callback from the highest price, the trailing stop order will be triggered and converted to a market sell order, and your position will be closed at the market price.
A trailing stop "buy" order is the opposite of a trailing stop "sell" order.
When you set a trailing stop buy order for a short trade, make sure the activation price is lower than the last transaction price. The price of the trailing stop order will decrease by a certain percentage. When the price of the asset goes down, the activation price of the trailing stop order will also go down, resulting in a new trailing stop order price. When the price of the asset goes up, the price of the trailing stop order will not move. If the last transaction price exceeds the preset rate of callback from the lowest price, the trailing stop order will be triggered and converted to a market buy order, and your position will be closed at the market price.
The conditions for both the activation price and the callback rate must be met before a trailing stop order can be executed as a market order and filled.
Differences between Trailing Stop Order and Stop Loss Order
1. Stop loss orders help to reduce losses, while trailing stop orders can limit losses while locking in profits.
2. Stop loss orders are fixed and must be reset manually, while trailing stop orders are more flexible and can move in the direction of price movements automatically.
How to Place a Trailing Stop Order?
Two conditions must be met for a trailing stop order to be triggered.
- The trigger conditions for a trailing stop buy order are:
Activation Price ≥ Lowest Price
Rebound Rate ≥ Callback Rate
- The trigger conditions for a trailing stop sell order are:
Activation Price ≤ Highest Price
Rebound Rate ≥ Callback Rate
1. Callback Rate
The callback rate determines how close the trailing stop price stays to the last transaction price. The callback rate can be anywhere from 0.1% to 5%. You can enter the callback rate manually, or select one of the quick options, such as 1% or 2%.
2. Activation Price
You can enter the activation price at which you want your trailing stop order to be triggered. If you don't enter an activation price, the last market price will be set as the activation price by default (the last contract price or mark price depending on the trigger type).
When you set a trailing stop buy order, the activation price must be lower than the current market price. Conversely, the activation price must be higher than the current market price for trailing stop sell orders.
For these conditions to be met, the highest/lowest market price must be equal to or greater than the activation price.
3. Types of Trigger
You can choose whether you want your trailing stop order to be triggered based on the "last price" or the "mark price". If you choose the mark price as the trigger, the trailing stop order will still be triggered when the mark price is equal to or greater than the activation price, even though the market price may not have reached the activation price.
Note that on ApolloX, liquidation is triggered and unrealized PnL is calculated based on the mark price. The mark price is usually slightly different than the last price. However, during times of high volatility, there may be a big difference between the last price and the mark price. If you place an order using the mark price but want to change it to the current price, or vice versa, you can cancel the order and place a new one.
- It's very hard to set the perfect callback rate and activation price. For a trailing stop order to work as intended, the callback rate shouldn't be too high or too low. Similarly, the activation price shouldn't be too far from the current price, nor too close. When the callback rate is too low or the activation price is too close to the current price, the trailing stop order will be too close to the entry price and is likely to be triggered in response to normal market fluctuations. In such cases, the market price doesn't have time to establish a clear trend that can be beneficial to the trader. The order could be triggered/closed by a small fluctuation in the market price, which will show up as a loss when the market price recovers.
- However, if the callback rate is too high, the trailing stop order will only be triggered in extreme market conditions. This means that you run the risk of bearing huge potential losses. During times of extreme volatility, it's best to use a higher callback rate, while a lower callback rate is more ideal for normal market conditions. There is no perfect callback rate or activation price. We recommend changing your strategy for using trailing stop orders in a timely manner based on the ever changing condition of the market.
- When placing an order, you should also consider your own risk tolerance, investment experience, economic capacity, and other important factors. When deciding where to set the callback rate and activation price, you should carefully consider your profit target and tolerance for loss in addition to how much the price of the asset might change.