This is part of an ongoing series where I dive deep into Binance and show you how to get the most out of the exchange
(Don’t have much time? Skip to: How to set a Trailing Stop Loss on Binance)
What is a Trailing Stop Loss?
A Trailing Stop Loss (TSL) is placed just like an ordinary Stop Loss when entering a position; the difference here is that unlike a typical Stop Loss which is static, a TSL will follow the price as it moves up and wait if the price moves down.
The distance at which the TSL follows the price can be determined as a percentage, so if the current price of ETH was $100 and you had a TSL of -10% then your TSL would begin at $90 and follow the price at a maximum deviation of 10%.
When should I use a Trailing Stop Loss?
Now you may be thinking: this is amazing! Why not use it all the time? But fortunately, I am here to tell you why that would be a bad idea.
A TSL is a tactical tool, it is more than just an extra precaution to throw on whenever you think you are being smart.
If used incorrectly, a TSL would most likely cause you to lose money.
A standard approach to trading, if holding a long position, is to move the Stop Loss up only after a pullback has occurred and the price is rising once again.
The Stop Loss is moved up to just below the lowest swing of the pullback. See Figure 1 as an example.
Unfortunately, if a pullback did occur, an active TSL would most likely be triggered causing you to exit the trade right before the coin rises again.
The true potential for a Trailing Stop Loss (TSL) lies in its ability to exploit a rallying coin, allowing you to capture as much profit as possible without needing to actually call the top.
Let’s look at an example, consider Bitcoin (BTCUSDT) May 13th, 11:00 am:
Imagine that after spotting a potential inverse head and shoulders, you see that BTCUSDT has tested its 7115.23 resistance and is ready for a breakout. You keep your eyes peeled and wait for your opportunity to enter a position.
Volume spikes and BTCUSDT breaks its resistance! You buy in around 7115–7120 with a TSL percentage deviation of 4%.
Typically, based on past highs, you would have some indication as to where the top might be. However, BTCUSDT has not traded within this range for over a year now, so accurately calling the top is almost impossible.
With your TSL in place, you ride it out and BTCUSDT reaches a high of 8099.60 before closing on the daily candle. At 7818.71, you exit the position and lock in a profit of 9.93%.
Ultimately, I made $142 on this exact trade since using a TSL enabled me to ride the rally until it had reached the top.
Another example of this happened on May 18th at 1:00 pm, where I used this same approach for NAVBTC. I entered a position at 0.0000310 with a tight TSL of 4.52%.
After 4 hours, NAVBTC closed the hourly candle with a high of 0.0000389; and locking in a profit of 20.96% (TSL triggered at 0.0000372). My position closed and I left with a gross return of $604.80 (approx. $500 starting position size).
In conclusion, using a Trailing Stop Loss (TLS) proved to be extremely successful when used on rallying coins, especially in situations where the top is hard to predict.
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How to Profit from a Trailing Stop Loss on Binance was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.