What is a Trailing Stop?
Another popular tool that traders use is the Trailing Stop. Trailing Stop is placed on an open position, at a specified distance from the current price of the financial instrument in question. The distance is measured in points. The main purpose of the Trailing Stop is to lock any potential profits. If the market keeps moving in the profitable direction, so does the Trailing Stop, always maintaining the Stop Loss at pre-selected point distance from the current price. If the market stops moving in the profitable direction, the Trailing Stop keeps the Stop Loss fixed. If the market goes against the profitable direction, it may eventually reach the Stop Loss level pre-set by Trailing Stop. Once the price reaches this level, the position is closed.
Trailing Stops are executed on the platform directly, from the Chart or the Terminal window, and not on the server like the Stop Loss and Take Profit. As soon as the trader’s profit becomes equal to or larger than the indicated distance, an automatic command is generated to place a Trailing Stop at the original distance from the current price. To disable Trailing Stop, set the “None” parameter in the control menu. In order to disable Trailing Stops from all the positions, set the “Delete All” parameter from the menu of any order.
What’s an example of a Trailing Stop in forex trading?
- Let’s say you’re going long on EURUSD and you set a 50-pip Trailing Stop after buying at 1.2550.
- If the price rises to 1.2600, your stop would also rise from its initial level of 1.2500 to 1.2550 (50 pips).
- The Trailing Stop will then stay at 1.2550 unless the price moves another 50 pips in your favour.
Your trade will stay open for as long as the price doesn’t go against you by 50 pips.
And here’s an example for a short position:
- You open a short position on EURUSD at 1.2800, with a trailing stop of 30.
- If the trade turns in the other direction and moves to 1.2830, you close the trade with a net negative of 30 pips.
- However, if the trade instead moves 30 pips in your favour to 1.2770, the trailing Stop effectively shifts to 1.2800 - the original entry price of the trade.
Can a Trailing Stop move backwards?
Once a Trailing Stop has moved either up or down, ‘trailing’ the market in a profitable direction, it cannot go into reverse.
Why use a Trailing Stop instead of a Stop Loss?
A Trailing Stop is more flexible. It automatically tracks the price direction of the currency pair and doesn’t have to be manually reset like a fixed Stop Loss.
Are there any drawbacks to Trailing Stops?
If you invest in a particularly volatile currency pair, the stop level may be triggered repeatedly - resulting in a series of small losses. The cost of opening further trades may also eat into your profits.
How wide should I make my Trailing Stop?
If your Trailing Stop limit is too close to the current price, it could be activated by normal market movement and lead to many losses and no gains. If it’s too wide, you risk unnecessarily large losses. Most traders find that Trailing Stops works best when set at 15% or 20%.
When using Trailing Stop Orders, remember:
You cannot completely avoid all trading losses by using Trailing Stop Orders. They are just one way to plan for potential losses. You can also use a Stop Loss,Sell Limit, or Stop Limit.
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Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.
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