Imagine this scenario:
When the BTC price is at 20,000 USDT, you open a long position of 1 BTC. Now, the BTC price has increased to 30,000 USD, and you're sitting on a nice profit. At this point, you're still bullish but worried about losing your current profits. How can you protect your profits and avoid losses? A trailing stop can help you!
1. What is Trailing Take-Profit/Stop-Loss?
Trailing take-profit/stop-loss is a type of order that trails the market price, allowing you to place a preset order within a specific percentage or amount away from the market price when the market fluctuates. When the market moves in your favor and then reverses, it helps limit losses and protect the profits.
As the price moves in a favorable direction, the trailing take-profit/stop-loss moves by a certain percentage or pre-set amount. As long as the market price continues to move in a direction favorable to the trader, it keeps the trade open, ensuring consistent profitability and locking in profits. Trailing take-profit/stop-loss orders never move in the reverse direction.
Unlike the regular take-profit/stop-loss orders, a trailing take-profit/stop-loss saves you from constantly adjusting prices based on market movements. This helps you in maximizing your profit after your order is placed.
Let’s dive into how trailing take-profit/stop-loss orders work for the long/short positions.
Refer to the chart above as an illustration. For the long position, the trailing take-profit/stop-loss order parameters are set to: "Activation Price = 10,000 USDT", "Callback Rate = 5%", and "Quantity = N".
The price starts moving from point A, then:
When the price reaches point B (activation price of 10,000 USDT), the trailing take-profit/stop-loss order is activated. At this point, the trailing take-profit/stop-loss order's trigger price is = 10,000 USDT * (1 - 5%) = 9,500 USDT.
As the price increases to 10,500 USDT (all-time high price), the trailing take-profit/stop-loss order's trigger price adjusts to 10,500 USDT * (1 - 5%) = 9,975 USDT.
If the price drops but doesn't reach the 5% callback rate, the trailing take-profit/stop-loss order's trigger price stays at 9,975 USDT since the all-time high price remains 10,500 USDT.
If the price goes up to 11,000 USDT (new all-time high price), the trailing take-profit/stop-loss order's trigger price changes to 11,000 USDT * (1 - 5%) = 10,450 USDT.
When the price falls to point C, which is 10,450 USDT, it meets the 5% callback rate and triggered the trailing take-profit/stop-loss order. The long position is then closed by selling at the market price.
Refer to the chart above as an illustration. For the short position, the trailing take-profit/stop-loss order parameters are set to: "Activation Price = 10,500 USDT", "Callback Rate = 5%", and "Quantity = N". The price starts moving from point A, then:
When the price hits point B (activation price of 10,500 USDT), the trailing take-profit/stop-loss order is activated. At this point, the trailing take-profit/stop-loss order's trigger price is = 10,500 USDT * (1 + 5%) = 11,025 USDT.
When the price falls to 10,000, which is the lowest price in history, the trailing take-profit/stop-loss order's trigger price = 10,000 * (1 + 5%) = 10,500
If the price increases but doesn't reach the 5% callback rate, the trailing take-profit/stop-loss order's trigger price stays at 10,500 USDT since the all-time low price remains at 10,000 USDT.
If the price drops to 9,500 USDT (new all-time low price), the trailing take-profit/stop-loss order's trigger price = 9,500 USDT * (1 + 5%) = 9,975 USDT.
When the price rises to point C, which is 9,975 USDT, it meets the 5% callback rate and triggered the trailing take-profit/stop-loss order. The short position is then closed by selling at the market price.
2. Examples of Trailing Take-Profit/Stop-Loss
Scenario #1: Closing a long position during favorable market conditions (surge and fall)
[Current Position] Long position of 1 BTC
[Entry Price] 30,000 USDT
[Latest Market Price] 31,000 USDT
According to the latest market price, the estimated unrealized PnL = (31,000 USDT - 30,000 USDT) * 1 = 1,000 USDT.
Assumption: Recent trends show that every rise is followed by a callback of no more than 3%. Based on this, it's considered normal if the market callback rate is within 3%, and the market is expected to continue rising. However, if the callback rate surpasses a certain threshold (for example, 5%), it's seen as the end of the bullish trend (price increase ends, and a sharp decline is imminent). The position should be closed before the market price drops significantly.
The trailing take-profit/stop-loss order will be set as follows:
[Activation Price] 32,000 USDT
[Callback Rate] 5%
Now, as the latest market price continues increasing to 32,000 USDT, it will trigger the trailing take-profit/stop-loss order. In the following price increment, if the system detects a 5% callback rate, the position will be automatically closed at the market price.
Scenario #2: Closing a short position during favorable market conditions (drop and rebound)
[Current Position] Short position of 1 BTC
[Entry Price] 30,000 USDT
[Latest Market Price] 29,000 USDT
According to the latest market price, the estimated unrealized PnL = (30,000 USDT - 29,000 USDT) * 1 = 1,000 USDT.
Assumption: Recent trends show that every dip is followed by a callback rate of no more than 3%. Based on this, it's considered normal if the market callback rate is within 3%, and the market is expected to continue declining. However, if the callback rate surpasses a certain threshold (for example, 5%), it's seen as the end of the bearish trend (price decrease ends, and a sharp increase is imminent).The position should be closed before the market price surges significantly.
The trailing take-profit/stop-loss order will be set as follows:
[Activation Price] 28,000 USDT
[Callback Rate] 5%
At this point, as the latest market price continues decreasing to 28,000 USDT, it will trigger the trailing take-profit/stop-loss order. During the subsequent price decrease, if the system detects a 5% callback rate, it will automatically close the position at the market price.
3. How to set a trailing take-profit/stop-loss order?
When setting up a trailing take-profit/stop-loss, there are 3 key parameters:
Callback Rate (Required)
The callback rate is the primary condition for calculating the actual trigger price. The actual trigger price is determined based on the all-time high/all-time low price and the callback rate. You can set the callback range using either the "callback rate" or the "trailing distance".
Callback Rate: If the all-time high price is set at 50,000 USDT with a 5% callback rate, a sell order will be executed when the price falls to 50,000 USDT * (1 - 5%) = 47,500 USDT.
Trailing Distance: If the all-time high price is set at 50,000 USDT with a 5,000 USDT trailing distance, a sell order will be executed when the price falls to 50,000 USDT - 5,000 USDT = 45,000 USDT.
Quantity (Mandatory)
The amount of the trailing take-profit/stop-loss order.
Activation Price (Optional)
The activation price sets the condition for triggering the trailing take-profit/stop-loss order. The order is triggered when the latest market price reaches or exceeds this price. Once activated, the system calculates the actual trigger price for the trailing take-profit/stop-loss order. If the activation price is not specified, the order is activated immediately upon placement. The default activation price is the current market price (either Index Price, Last Price or Mark Price).
a. Setting the trailing take-profit/stop-loss
Step 1: Click "Orders" on the Futures page, then click "Add" to go to the settings page.
Step 2: Click "Trailing TP/SL," enter the "Callback Rate/Trailing Distance," "Quantity," and "Activation Price" to finish setting up. If you don't set an activation price, the trailing take-profit/stop-loss order will activate immediately when you place the order.
b. View the trailing take-profit/stop-loss
You can view all your current trailing take-profit/stop-loss orders by clicking the 'View' button on the right side of the Position page.
Cancel the trailing take-profit/stop-loss
Click the delete icon to cancel the related order on the "Trailing take-profit/stop-loss" page. To cancel all trailing take-profit/stop-loss orders, click 'Cancel All".
4. How Does the Trailing Take-Profit/Stop-Loss Operate?
Activation rules:
If no activation price is set, it will be activated immediately upon order placement.
The activation price can be set to the Index Price, Mark Price, or the Last Price. When the activation price is triggered, the trailing take-profit/stop-loss is activated.
Trigger rules:
Close Short: Last Price ≥ Trigger Price
Close Long: Last Price ≤ Trigger Price
How the trigger price is calculated:
Close short:
By Trailing Distance: Lowest Price + Trailing Distance
By Callback Rate: Lowest Price * (1 + Callback Rate)
Close long:
By Trailing Distance: Highest Price - Trailing Distance
By Callback Rate: Highest Price * (1 - Callback Rate)
5. Reminder
a. Before the trailing take-profit/stop-loss successfully triggers, your position will not be frozen.
b. The trailing take-profit/stop-loss order may not be successfully triggered due to conditions like the contract being in a non-trading state. Like a regular market order, a successfully triggered market order and may not always execute. Unfilled market orders will be displayed in Open Orders.
c. If the order executes, it will close all or part of your position. If the order fails to be executed, your position will remain unchanged.
d. Similar to market take-profit/stop-loss orders, the amount of trailing take-profit/stop-loss orders that can be placed can vary for different contracts. These limits may be adjusted based on market changes.
*Please note:
It is very challenging to set the optimal callback rate and activation price.
To ensure a trailing take-profit/stop-loss function as intended, the callback rate shouldn't be too small or too large, and the activation price shouldn't be too close or too far away from the current price. If the callback rate is too small or the activation price is too close to the current price, the trailing take-profit/stop-loss will be positioned too close to the entry price and can be triggered by regular market fluctuations. This leaves little opportunity for the trade to progress in a direction that benefits the trader before any significant price movement happens. Minor market fluctuations might trigger or close the order, causing the user's trade to show a loss when the market price recovers.
But if the callback rate is too large, the trailing take-profit/stop-loss will only trigger in extreme market conditions. This exposes users to unnecessary risks of significant loss.
Increasing the callback rate is a better choce during highly volatile markets, while a lower callback rate is more suitable for normal market conditions.
There is no perfect callback rate or activation price. We recommend that users continuously adjust their trailing take-profit/stop-loss strategy based on changing market conditions. When placing orders, you should consider your risk tolerance, investment experience, financial capability and other crucial factors. In determining the callback rate and activation price, users should carefully consider not only the range of price changes but also their profit targets and loss tolerance.