What is a stop loss?

A stop-loss is a tool used to limit an investor's loss on a position if price trends towards the trade becoming a losing position. For example, placing a stop-loss 5% away from where the trade was entered (placed above/below price entered depending on short/long position) will limit your loss to 5% if price action moves to the price level where the stop loss was placed.

What is a trailing stop loss (trailing stop)?

A trailing stop loss (trailing SL) is a different kind of trade order in which the stop loss price is not set at a single, total dollar amount; instead, it is marked at a specific percentage or a pre-determined dollar amount away from market price. This trailing stop loss can either be placed under or over the market value of the asset being traded but this will be dependent on whether the position entered is a long or short position. If the position is long then the trailing stop will be placed below the market price and placed above if the position is short.

A trailing stop-loss is a way to protect yourself from an investment's retracements while securing the upside as your position moves further into the profit. For example, you buy/long Crypto XYZ for $10. You reason that you would not want to lose more than 5% on your investment (stop loss would originally be placed at $9.50 for this example), and that you want to have the ability to prosper from any price increases.

 When the price increases to $12, if a trailing stop-loss were placed, then the trailing SL would move with to a new price of $11.40 (5% below current price). The stop loss would be executed and the trade would be closed if price then moved to $11.40 in comparison to before when it was placed at $9.50. A trailing SL price level is entirely dependent on the market price of the asset being traded.

A trailing stop loss would work inversely to the example above if it was a sell/short position.

A trailing stop-loss can be good for individuals who may not have enough discipline to lock-in gains or cut losses. It removes some of the emotion from the trading process and offers some capital protection automatically.

There are some drawbacks to consider. First, you need to consider your trailing stop percentage or amount very carefully. If you're investing in a particularly volatile stock, you could find the stop level triggered fairly frequently, thus not allowing the trading bot to complete the trade for itself.

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