What is a Trailing Stop Order?

A trailing stop order helps traders limit losses and protect profits during market volatility. It places a pre-set order at a specific percentage below the market price, allowing traders to lock in profits as the price moves in a favorable direction.

When the market price moves in a favorable direction, the trailing stop order moves along with it, maintaining a specified percentage or amount below the market price. This allows traders to hold their positions and continue to profit as the price moves favorably.

However, if the price moves unfavorably by a specific percentage, the trailing stop order will close/exit the trade at the market price. This helps limit losses and protect profits by closing the trade when the price moves against the trader.

It is important to note that the trailing stop order does not move in the opposite direction. Therefore, traders must set the trailing stop order at a level that reflects their risk tolerance and market conditions. Additionally, a trailing stop order can be placed as a reduce-only order to reduce or close an existing open position.

How Does a Trailing Stop Order Work?

Traders can place a trailing stop order when initially opening a position, although this is uncommon. Generally, traders use a trailing stop order to manage risk and protect profits after opening a position.

When you open a long trade, you place a trailing stop sell order above the current (initial) market price. As the market price moves favorably, the trailing stop price will move up by a specific percentage or amount. This means the trailing stop price will adjust upwards with the market price, forming a new trailing stop price.

However, if the price moves downwards, the trailing stop order will stop moving. If the market price moves against you and falls below the trailing stop price, a sell order will be triggered and executed at the next available market price, closing the trade.

If you already have an existing long position, you place a trailing stop sell order below the current market price. As the market price moves up, the trailing stop price will move up by a specific percentage or amount. If the market price moves against you and falls below the trailing stop price, the sell order will be triggered and executed at the next available market price, closing the trade.

A trailing stop buy order is the opposite of a trailing stop sell order.

If you have an existing short position, you place a trailing stop buy order above the current market price. As the market price moves favorably, the trailing stop price will move down by a specific percentage or amount. This means the trailing stop price will adjust downwards with the market price, forming a new trailing stop price.

When the price rises, the trailing stop order stops moving. If the price rises by more than the pre-determined callback rate and reaches the trailing stop price, the system will place a buy order and close the trade at the market price.

Note: To activate a trailing stop order to exit a trade using a market order, both the activation price and callback rate conditions must be met.

Difference Between Trailing Stop Orders and Stop Orders

• Stop Orders: Help you minimize losses by setting a fixed stop price that needs to be manually reset.
• Trailing Stop Orders: More flexible as they automatically track the price direction, locking in profits while limiting losses.

How to Place a Trailing Stop Order?

To activate a trailing stop order, two conditions must be met.

For a Trailing Stop Buy Order:

• Activation Price ≥ Lowest Price
• Rebound Rate ≥ Callback Rate

For a Trailing Stop Sell Order:

• Activation Price ≤ Highest Price
• Rebound Rate ≥ Callback Rate

Callback Rate

The callback rate is the percentage of adverse price movement you are willing to accept. The callback rate range is from 0.1% to 10%, which can be manually set in the "Callback Rate" field.

Activation Price

The activation price is the price you want to trigger the trailing stop order. If no activation price is set, it defaults to the market price (based on the trigger type, which could be "Last Price" or "Mark Price").

To place a trailing stop buy order, the activation price must be below the market price. Conversely, the activation price must be above the market price to place a trailing stop sell order.

Types of Triggers

You can choose either "Last Price" or "Mark Price" as the trigger point. If you choose "Mark Price," the trailing stop order will activate when the mark price reaches or exceeds the activation price, even if the last price has not yet reached the activation price.

Note: BitMart uses the mark price to trigger forced liquidation and measure unrealized profits and losses. The mark price typically closely follows the last price, but during significant price volatility, the last price can deviate significantly from the mark price. Therefore, monitor the spread between the last price and the mark price. You can cancel your order at any time; if you want to change the trigger from the mark price to the last price, you can re-place the order and vice versa.

Important Tips

To keep the trailing stop order effective, the callback rate should neither be too low nor too high; the activation price should neither be too close nor too far from the market price. When the callback rate is too low or the activation price is too close to the market price, the trailing stop will be too close to the opening price and easily triggered by normal market fluctuations. This leaves little room for the trade to develop favorably before significant price trends occur. The trade will be closed/exit during a temporary market downturn, leading to losses.

When the callback rate is too high, the trailing stop order will only trigger during extreme market movements, exposing the trader to unnecessary significant loss risks.

During high volatility, a higher callback rate is usually a better choice, while under normal market conditions, a lower callback rate is recommended.

There is no best callback rate and activation price; as market prices fluctuate, it is advisable for traders to frequently adjust their trailing stop strategy. Always carefully consider whether the trade aligns with your risk tolerance, investment experience, financial situation, and other relevant factors. Additionally, decide your callback rate and activation price based on your target profit level and acceptable loss extent.

Examples

(1) Placing a Trailing Stop Sell Order for a Long Trade

BTCUSDT perpetual contract's last price is 10,000 USDT. User A places a trailing stop order as follows:

• Callback Rate: 5%
• Activation Price: 10,500 USDT
• Trigger Point: Last Price

When the last price is 10,000 USDT, the trailing stop price is 9,500 USDT. When the price rises to 10,500 USDT, the new trailing stop price becomes 9,975 USDT [last price * (1 - callback rate)].

When the price falls, the trailing stop price stops moving. When the price rises to a high of 11,000 USDT, the new trailing stop price becomes 10,450 USDT. When the price falls again, the trailing stop price stops moving. When the price fluctuates by more than 5% and reaches or exceeds the trailing stop price of 10,450 USDT, a sell order is executed at the market price to close the position.

Conditions met:

• Activation Price (10,500 USDT) < Highest Price (11,000 USDT)
• Rebound Rate (5%) ≥ Callback Rate (5%)

(2) Placing a Trailing Stop Sell Order for a Long Trade

BTCUSDT perpetual contract's last price is 10,500 USDT. User A places a trailing stop order as follows:

• Callback Rate: 2%
• Activation Price: 11,000 USDT
• Trigger Point: Last Price

Scenario A - Both conditions met

• The last price rises from 10,500 USDT to 11,500 USDT (highest price) and then falls to 11,200 USDT.

• The trailing stop order is executed, and a sell order is placed at the market price as the conditions are met:

  • Activation Price (11,000 USDT) < Highest Price (11,500 USDT) = Condition met
  • Rebound Rate (2.61%) > Callback Rate (2%) = Condition met

Scenario B - Only one condition met

• The mark price rises sharply from 10,500 USDT to 11,500 USDT (highest price) and then falls to 11,450 USDT.

• The trailing stop order is not executed as only one condition is met:

  • Activation Price (11,000 USDT) < Highest Price (11,500 USDT) = Condition met
  • Rebound Rate (0.43%) < Callback Rate (2%) = Condition not met

(3) Placing a Trailing Stop Buy Order for a Short Trade

BTCUSDT perpetual contract's mark price is 10,500 USDT. User A places a trailing stop order as follows:

• Callback Rate: 3%
• Activation Price: 10,000 USDT
• Trigger Point: Mark Price

Scenario A - Both conditions met

• The mark price falls from 10,500 USDT to 9,500 USDT (lowest price) and then rises to 9,800 USDT.

• The trailing stop order is executed, and a buy order is placed at the market price as the conditions are met:

  • Activation Price (10,000 USDT) > Lowest Price (9,500 USDT) = Condition met