1、What is Trailing TP/SL
Trailing Take Profit and Stop Loss allows the user to preset commissions within a price range of a specific percentage of the market price during market fluctuations. It helps the trader to limit losses and protect gains when the market moves in a direction that the trader believes is favorable and then pulls back.
When the price moves in a favorable direction, the Trailing Take Profit Stop Loss will simultaneously move by a specific percentage. As long as the price moves in the trader's favor, it keeps the trade open and continues to take profits to lock in gains. The Trailing Take Profit and Stop Loss will not move in the opposite direction.
2、The rules of Trailing TP/SL
In case the user holds a long position, the parameters of the Trailing Take Profit and Stop Loss are set as follows:
Activation price: 9000
Callback Rate: 5%
At this point, as the market fluctuates, the user's Take Profit and Stop Loss orders will change as follows:
- When the market's latest price fluctuations to 9000, the system activates the trailing take-profit stop-loss order, the trigger price = 9000 * (1-5%) = 8550
- If the market continues to rise, when the market price fluctuations to 9500, the highest price, the trigger price = 9500 * (1-5%) = 9025
- If the market falls to 9200, because the highest price is still 9500, and the retracement ratio does not meet the 5%, so the order is still not triggered at this time, the trigger price is still 9025
- If the market rises to 10000, breaking through the original maximum price of 9500, the trigger price = 10000 * (1-5%) = 9500
- If the market falls to 9500, the callback rate is met, the trailing stop loss order is triggered and commissioned to the market at the market price to close position
In case the user holds a short position, the parameters of the Trailing Take Profit and Stop Loss are set as follows:
Activation price: 10000
Callback rate: 5%
At this point, as the market fluctuates, the user's Take Profit Stop Loss order will change as follows:
- When the latest market price reaches 10000, the system activates the mobile take-profit stop-loss order, the trigger price = 10000 * (1 + 5%) = 10500
- If the market continues to fall to 9500, this is the current lowest price, the trigger price = 9500 * (1 + 5%) = 9975
- If the market rises to 9800, since 9500 is still the current lowest price, the trigger price will remain at 9975, and the order will not be triggered due to the failure to meet the callback ratio of 5%.
- If the market falls to 9200, the original minimum price of 9500 has been broken, so the trigger price at this time = 9200 * (1 + 5%) = 9660
- If the market rises to 9660, the pullback ratio meets 5%, the mobile take profit and stop loss order triggered and entrusted to the market according to the market price to close position.
3、Use Cases of Trailing TP/SL Orders
Assuming: It's determined that each price rise has a callback rate of no more than 3% based on the recent market movements. Prediction: Any callback rate of no more than 3% can be considered a normal callback in the near future, and the market will continue to move upward. On the contrary, a callback rate exceeding a certain value (let's say, 5%) can be interpreted that the bullish momentum has ended (the price rises no further and is likely about to plummet). In this case, the position needs to be closed before the market price plummets.
Current Position: 2 BTC long position
Entry Price: 40,000
Latest Market Price: 42,000
Based on the current market price, estimated unrealized PnL = (42,000 - 40,000) * 2 = 4,000 USDT
So, we set a trailing TP/SL order with the following parameters:
Activation Price: 43,000
Callback Rate: 5%
At this point, when the latest price continues to rise to 43,000, the trailing take-profit stop loss will be activated and calculated at the time of the trigger price [43,000 * (1-5% = 40,850)], and in the market, if the proportion of the retracement reaches 5%, i.e., 40,850, it will be triggered to move the take-profit stop and commissioned to the market at market price to close position, at this time, the profit and loss = (40,850 - 40,000) * 2 = 1700
Entry Price: 40,000
Latest Market Price: 38,000
Based on the current market price, estimated unrealized PnL = (40,000 - 38,000) * 2 = 4,000 USDT.
Activation Price: 36,000
Callback Rate: 5%
3、Activation and Trigger Rules
1. Trailing TP/SL can only be applied to close a position;
2. Activation price (optional): the activation price is the condition for activation of a Trailing Take Profit or Stop Loss. The order is activated when the latest market price reaches the activation price. After activation, the system starts to calculate the actual trigger price of the Take Profit or Stop Loss. If you do not fill in the activation price, i.e., after placing an order, it will be activated according to the latest price or the marked price at that time, and the system will calculate the actual trigger price of the Stop Loss and Take Profit.
- For long positions, the activation price should be higher than the latest price/marked price;
- For short positions, the activation price must be lower than the latest price/marked price;
3. Callback mode (required):
- Callback Ratio: Set the pullback ratio to trigger a take profit.
- Trailing Price: Set the callback spread for take profit triggering.
Trigger Price Calculation
- Long Position
- Callback Ratio: Trigger Price = Highest Price * (1 - Callback Ratio)
- Trailing Price: Trigger Price = Highest Price - Trailing Price
- Short Position
- Callback Ratio: Trigger Price = Lowest Price * (1 + Callback Ratio)
- Trailing Price: Trigger Price = Lowest Price + Trailing Price
4. Quantity (required): the number of commissions to set up a Trailing TP/SL order
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4、Notes
1. Positions will not be frozen before the triggering of a Trailing TP/SL
2. Trailing TP/SL orders may not necessarily be successfully triggered, may be due to the contract is in a non-trading state and other factors such as order failure, triggered orders are equivalent to the ordinary market orders, not necessarily transacted, specific to the prevailing market conditions shall prevail;
3.Setting an optimal callback rate and activation price could be a daunting process.
For a trailing TP/SL to be effective, a callback rate should neither be too small nor too large and the activation price should neither be too close nor far away from the current price. When the callback rate is too small or the activation price is too close, the trailing TP/SL is too close to the entry price and is easily triggered by normal daily market movements. There is no room for a trade to move in the direction favorable to traders before any meaningful price move occurs. The trade will close/exit at a point where the market took a temporary dip and then recovered, resulting in a losing trade.
On the contrary, if the callback rate is too large, the trailing TP/SL will be only triggered by extreme market movements, which means the traders are taking on unnecessarily large risks.
There is no ideal optimal callback rate and activation price. Traders are advised to revise their trailing TP/SL strategy from time to time based on price fluctuations in the market. You should always carefully consider whether a trade is consistent with your risk tolerance, investment experience, financial situation, and other considerations that may be relevant to you. In addition to the range of price changes, always determine your callback rate and activation price based on your profit target and loss tolerance.