Understanding Trailing Stop Loss: An Automatic Protection Strategy for Your Trading

If you want to protect your profits while allowing your position to continue growing, trailing stop loss can be the solution you’re looking for. What is a trailing stop loss? It is a special order that automatically adjusts with market price movements, giving you full control without the need to monitor the screen 24/7.

This type of order is designed for traders who want flexibility: maximizing profits when prices move favorably, while automatically setting a limit on losses. Unlike conventional static stop loss orders, a trailing stop loss continuously follows the price when the market moves in your favor.

What Is a Trailing Stop Loss and How Does It Work

A trailing stop loss is an order mechanism that places a sell point at a certain distance below or above the current market price. This system works with simple yet powerful logic: as long as the price moves in your favor, your stop point continues to rise (for selling) or fall (for buying). But as soon as the price moves against you, the order is triggered.

The main advantage is that you don’t need to worry about “when is the right time” to exit a position. This system automatically evaluates every price movement and activates the exit order at the optimal moment based on the parameters you previously set.

Two Types of Trailing Stops: Based on Percentage and Fixed Amount

When setting a trailing stop loss, you have two main options. The first is a percentage-based trailing stop, where you determine the maximum retracement as a percentage from the highest price. The second is a fixed amount trailing stop, which uses a specific rupiah or currency value as the distance limit.

Each method has its own advantages. Percentage-based stops are more flexible because they adjust to price volatility, while fixed amounts provide certainty in the nominal rupiah or currency value you will gain or lose.

Practical Example: Percentage-Based Trailing Stop

Imagine you buy an asset at $100 and set a trailing stop loss at 10% below the market price. Here’s a possible scenario:

First, if the price drops directly to $90, your trailing stop will be triggered immediately, and the order will sell at the current market price. Your loss will be limited to 10%.

Second, if the price rises to $150 then falls to $140, your trailing stop loss will not be activated. Why? Because your activation point is now $135 (10% below the peak of $150). The drop to $140 has not reached that level, so the position remains open.

Third, if the price continues to rise to $200 then drops 10% to $180, the trailing stop order will be triggered immediately, and you will sell at $180. The system has followed each price peak and protected your profits perfectly.

Practical Example: Fixed Amount Trailing Stop

Now let’s look at a scenario with a fixed amount. Suppose the current price is $100 and you set a trailing stop at $30 below the current market price.

If the price drops directly by $30 to $70, the trailing stop order will be triggered immediately, and you will sell at the market price. Your loss will be fixed around $30 per unit.

If the price rises to $150 then falls to $130, your trailing stop is still not active. Because now the activation point is at $120 (which is $30 below the highest level of $150 reached).

However, if the price reaches $200 and then drops $30 to $170, your order will be triggered at $170. The trailing stop system has tracked every increase and maintained your profit consistently.

Important Points You Need to Understand About Trailing Stops

There are several crucial points before you routinely use a trailing stop loss. Your position and margin will not be frozen until the trailing stop order is actually triggered. This means you must ensure you have enough margin balance at all times to keep your position open.

Additionally, there are conditions that can prevent the optimal activation of a trailing stop loss, such as extreme price limits, trading volume restrictions, insufficient margin, trading mode being off, or system technical errors. Once the order is successfully activated and enters the regular order phase, execution is no longer guaranteed at an ideal market price—just like any other market order.

You can monitor all unfilled market orders through the “Open Orders” section on your trading platform.