Trailing stop loss is arguably one of the best risk management and profit optimization tools out there and it's barely being talked about. Here's a quick overview of it.

I'm a bit surprised that it's not being talked about a lot on here especially considering that it's perfectly suited for long-term strategies such as DCA or Buy The Dip. Here's what it is, how it works, and why it's arguably the best risk management tool out there.

At its core, a trailing stop loss is both a measure of risk limitation as well as maximizing potential gains. While it shares similarities with the standard stop-loss order, its adaptability sets it apart. Because it “trails” or follows the current price of the asset, a Trailing Stop Loss can have a significant impact over the profitability of your crypto trading bots, and trading in general.

In a traditional stop loss, the order remains static. The trailing stop loss, in contrast, adjusts in accordance with market fluctuations. Let's say you place and execute a buy order for a crypto of your choice at $100 and set a standard stop loss at $90. Regardless of how high the asset’s value may soar, a drop to $90 triggers a sale. Yet, what happens if the asset’s value reaches $150? A static stop loss doesn’t factor in this new peak. You may opt for a Take profit, but how do you ensure that you close your position around the top and not sooner?

This is where your strategy would benefit from a Trailing Stop Loss. By setting a $10 trailing stop loss, as the asset’s value rises to $150, the stop adjusts to $140. If a decline to $140 occurs, the stop activates, preserving a $40 profit per unit.

The image below is a pretty good illustration of how it works.

https://preview.redd.it/cqm02dag0tob1.png?600&format=png&auto=webp&s=7dbb0827053c5c312843be48b531012ea6bf6402

So long as the trend is upwards, the order remains open, so you don't have to arbitrarily guess when to "take profit". Once the trend starts to reverse, the order is closed, therefore allowing you to close your order at the optimum time and not a moment too soon. This can be a useful tool if considering closing some positions in the next bull market.

Naturally, the threshold depends on your own risk tolerance. That's all I have :)

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