What is a Trailing Stop-Loss?
A trailing stop-loss is a game-changing order that moves your stop-loss up incrementally as an asset’s price increases to protect profits and limit losses. You set a certain percentage or dollar amount, and your stop-loss follows (“trails”) the asset price.
In English, this means if your coin’s price goes up, your stop-loss also goes up, so you can bank those profits and not risk losing the gains you’ve already made. The cool thing is that it caps losses but doesn’t cap your gains – at least not directly.
Here’s what could happen without one…
Say you buy Bitcoin at $40,000 and the price rockets up to $45,000. Yes! Huge profits. You’re thinking of starting a Guru YouTube channel now. Numb and euphoric, you climb into your bed, kiss your partner goodnight (it’s 4am, they’ve been asleep since 11), and drift off dreaming of buying million dollar NFTs of rocks and apes.
You wake up at 1pm the next “morning”, check your account, then see it…BTC is now $37,000. What. The. F……
This is why pro traders use a trailing stop-loss, so when the price moves up they don’t have to wake up to the rage of losing everything if the price falls.
Still with me? Cool.
The rest of this guide is dedicated to explaining the what, why, and how of a trailing-stop loss. Including how to use one, how to set one, and why you might not even want to do it.
Probably not, but let’s just do it anyway.
How Does a Trailing Stop-Loss Work?
A trailing stop-loss works much in the same way as a regular stop-loss, except when the price moves up, the stop moves up.
That way, if the price reverses, you don’t lose any of the profits that you’ve already gained.
So, in the beginning, you’d set this “moving stop-loss” at a point below the intended “entry price” – the price where you buy the coin – as a safeguard against losing too much on the trade. This is for a long trade, by the way.
Usually, traders set their trailing stop-loss at a percentage “behind” the price – typically anywhere from 5%-15%. So if the price moves up 5%, the stop-loss also moves up 5%.
If the price goes up 10%, the stop-loss moves up…you guessed it…10%! Now you see the value? If you gain 10% on the trade, it’s now in your pocket.
While we’re on the topic of percentages…
Quick Question - What is a Good Trailing Stop-Loss Percentage?
A good trailing stop-loss percentage is anywhere between 5-15%, sometimes even 15%-25%.
It totally depends on the market at the time and how much price volatility you’re expecting.
However, there is no real way to tell you exactly where to set your trailing stop-loss…Unless you trade with ProfitFarmers.
Shameless plug incoming, but hear us out.
We use a group of high-probability trading strategies that we personally invented. They even have fancy names.
Think of it as a form of trend trading where we patiently wait for high-probability, low-risk trades based on undeniable market trends and human trading psychology.
Once we’re certain a trend is in action, we jump in at the best time to ride the wave and make steady gains. That’s why our Break-Even Stop-Loss features functions in a completely different way than anything else online.
Since our trades hit their targets so often (not bragging – just facts!), we use take-profit targets as trigger levels for the stop-loss instead of percentages.
If you’re interested in seeing what this feature looks like in action, check out our Break-Even Stop-Loss feature page.
Pros and Cons of a Trailing Stop-Loss
An Example of Our Break-Even Stop-Loss in Action
Here’s a very basic example using a Bitcoin trade.
BTC Entry Price – $39,000 – $42,000
Stop-Loss – $38,500
Take-Profit Target 1 – $47,000
Take-Profit Target 2 – $48,000
Take-Profit Target 3 – $49,000
Take-Profit Target 4 – $50,000
OK, so in this case, if you buy in at the entry zone of $39,000 – $42,000 and the price falls to $38,500, you would automatically be exited from the trade. You lost the maximum amount you were willing to risk, so lick your wounds and live to fight another day.
The problem is that crypto is BATS**** crazy.
The price could go up to $47,000, then to $48,000 and all the way up to $49,000 or more, and then plummet down to $38,000 overnight.
So, what happens is traders often see the price go up and think “yes! MONIEZ!!”, only to wake up the next day and see the price had plummeted so far that their stop-loss was activated. #REKT.
All that profit you thought you had turned to dust. It’s a gut wrenching feeling. But with Break-Even Stop-Loss, you would have exited the remainder of your trade at Target 2 ($48,000).
Here’s how that trade would look with Break-Even Stop-Loss turned on:
Entry Price = Stop-Loss at starting position ($38,500)
Target 1 Reached = BESL moves to the entry price ($39,000 – $42,000)
Target 2 Reached = BESL moves to Target 1 price ($47,000)
Target 3 Reached = BESL moves to Target 2 price ($48,000)
Target 4 Reached = BESL moves to Target 3 price ($49,000)
Making sense? Check out the video below to see how it looks on a chart:
Advantages of a Trailing Stop-Loss
There are a few reasons traders love our Break-Even Stop-Loss feature:
- It locks in profits and protects against volatility – Crypto is BRUTAL. Prices can go from euphoria to manic depressive in a split second.
Now you know why traders set price alarms at all hours of the night and rarely have happy lives.
Setting trailing stop-loss locks in profits when the price pumps so winning trades don’t turn into losers.
- It limits losses – Makes sense right? It’s easy for a price to rocket up 200% then down 100%, killing all of your gains. By moving the stop-loss up you protect yourself from losing any money.
- It frees up your time – Setting an automated trailing stop percentage or limit frees up your time to go live a real life and socialize with other human beings.
You don’t have to sit in front of the charts all day watching the price or lay awake all night stressing about your trades.
Disadvantages of a Trailing Stop-Loss
Before we get into the disadvantages of a trailing stop-loss, you need to understand a bit more about the bloodbath of crypto day trading.
Sometimes it feels like prices have a mind of their own. They’re up 10%, then down 25%, then down 100%, then up 500%, then down so low ‘antidepressant’ Google searches spike 100x overnight.
That’s crypto. Sometimes you make a fortune and sometimes you get rekt. It takes a lot of nerve and patience to be a long term profitable trader.
With that in mind, the main disadvantage of a trailing stop-loss is that sometimes the price of a coin will dip before rocketing up to reach higher targets, which could have made you massive gains.
If your stop-loss moves up, you’ll get “stopped-out” of a trade. Here’s an example:
Here the stop-loss moves up to the Entry Price, and when the price dips down, the trade is exited. But notice that had you just kept the stop-loss at the original position, the trade would have continued and you’d have made a killing at Target 2 and beyond.
What we’re saying here is that sometimes less risk means less reward. In this case, moving the stop-loss up prevented you from losing any money had the price taken a dive, but it also prevented you from making more gains.
Fortune does favor the bold.
How to Set a Trailing Stop-Loss
There are two ways to set a trailing stop-loss. One is a pain in the A** and the other is as simple as flipping a switch.
In option one, you determine a dollar amount or percentage, and manually set a trailing stop-loss in whichever exchange you happen to be using. There are two things you need to keep in mind when setting your trailing stop-loss manually:
- Your risk tolerance: How much are you willing to lose on any one trade? There’s no single right answer – it totally depends on you, your account balance, and your goals.
Typically, it’s recommended to never risk more than 2%-5% on any one trade. If you don’t understand risk management yet, you aren’t ready to trade.
Read our guide on the 4 differences between winning and losing traders to get started.
- The coin you’re trading: Look, we could write a book on this. For now, just know that your stop-loss price will depend on the volatility of the coin you’re trading. With more stable coins, you can be more conservative.
OK, so you need to do all of that just to set it properly. And some exchanges, like Binance, cap the percentages. Binance caps theirs at 5% and it’s only for Futures Trading.
This is done PURPOSELY to make it more difficult for you to trade, and probably to benefit whichever whales are running the markets up and down at warp speed. The harder it is for you to execute professional trades, the easier it is for them to manipulate things.
If you want to learn more about how trading is a rigged game, check out our article on why the whales always win.
The other way is just use ProfitFarmer’s Break-Even Stop-Loss. With just the flip of a switch, it does all that calculation for you.
Better yet, that calculation isn’t even needed – our trading strategy has the optimal stop-loss strategy baked into it.
Other systems require you to do this all manually, and that’s IF they even offer it. That usually requires years of experience, technical analysis, or sitting there all day manually moving your stop-loss up as the price increases.
At ProfitFarmers, it’s literally all done for you just by clicking a button.
Trailing Stop-Loss vs. Trailing Stop Limit: What’s the Difference?
There’s quite a bit of confusion around these two, so let’s wrap up by sorting this all out.
If you want to understand the difference between a stop-loss and stop-limit, we need to start with market orders vs. limit orders.
Basically, a market order tells the system “hey, once this stop-loss price hits, sell, sell, sell. And get it done as quickly as possible no matter what happens”.
A limit order on the other hand says “hey, once this stop-loss price hits, sell, sell, sell, BUT not below this limit price that I’ve set”.
Flashback to our previous BTC example.
With a stop-loss of $38,500, your trade would be exited immediately at $38,500 pretty much no matter what happens. The system will keep trying to sell off your coins no matter what happens to the price.
With a stop limit, you’d also set that same stop-loss, but then you’d set an extra limit BELOW that stop-loss telling the system “don’t sell below this price”.
So, say you set the limit at $38,000 – if the price hits $38,500, the system will attempt to sell off your BTC, but not at a price below $38,000. If a buyer can’t be found, you’re screwed.
The benefit of a trailing stop limit is that prices might crash down then spike back up. If they do, you didn’t sell off at a super low price.
The disadvantage is prices might spiral out of control down to god knows where, and you didn’t get out while you still had the chance.
Remember, Crypto is CRAZY. Think very carefully about using a trailing stop limit vs a standard trailing stop-loss.
Have you heard of price liquidation cascades? No?
Imagine a long line of dominoes starting from just above your chosen stop-loss price at $38,500 all the way down to $0.
When the degenerate traders above you get stopped out they do a market sell and get out “now now now, no matter what happens”, just like we mentioned above.
Great for them, the trouble is, their sell order just nudged the price down into some more stop-loss levels…which then triggered more and more and more stop-losses.
The dominoes (stop-losses) cascade down faster than a waterfall, and sometimes that means down to $0.
If you went with the trailing stop-loss you got out and maybe took a bit more damage than you’d lined yourself up for.
But if you used a trailing stop limit, you’re left swinging your candlestick in the wind and thinking about the job center opening hours…
Crypto trading is absolutely BRUTAL. Have you met a happy trader? Doubt it.
Setting a trailing stop-loss is a low-risk, medium-reward strategy that focuses on the stable, long-term growth of your trading account. Now, maybe you can actually find some happiness in trading.
When you set one, you lock-in profits and protect against losses at the expense of perhaps missing out on major gains if the price dips before rocketing up to higher targets.
It’s not perfect, but if you prefer to minimize risk, live with peace of mind, get some actual sleep, you can either learn all of the technical analysis and strategy of setting your own trailing stop-loss or you can try ProfitFarmer’s automated Break-Even Stop-Loss feature.
Q: How to use a trailing stop-loss?
A: You use a trailing stop-loss by setting a percentage or dollar amount “behind” the price. Then, your stop-loss will always move in that increment with the price.
For example, if you set it to 5%, then if the price moves up 5%, your stop-loss will move up 5%.
Q: When to use a trailing stop-loss?
A: You use a trailing stop-loss when you prefer to minimize risk and live with peace of mind.
By setting one, you allow yourself to step away from the charts and live a normal life rather than monitoring the prices all day.
You can live with peace of mind knowing you won’t lose profits in a trade.
Q: Is there a trailing stop-loss calculator?
A: Technically, yes. ProfitFarmers Break-Even Stop-Loss calculates your trailing stop-loss for you according to pre-set take-profit targets.
There’s no real single way to calculate your trailing stop-loss. It totally depends on your risk tolerance, trading strategy, the coin in question, and the market conditions.
However, with ProfitFarmers, our system automatically calculates it for you according to our trading strategy.
Q: Is there a trailing stop-loss on Binance?
A: Yes, Binance does have a trailing stop-loss feature, but it’s severely limited. It’s limited to Futures only and it’s capped at 5%. There’s very little you can do with this type of limitation.
To place a trailing stop order, you need to calculate your callback rate (the percentage), the activation price, and order quantity.