Definitions
Trailing Stop is a unique type of stop loss order useful for locking profits on winning trades.
What is Trailing Stop?
Trailing Stop is the floating stop-loss order which allows the trader to use current situation on market maximally.
Trading of Forex with Trailing Stop helps to increase profits with already set Take Profit order and to reduce losses or even turn them into profit with already set Stop-loss.
Trailing Stop moves the Take Profit level at certain sum of points from the price level as it approaches.
The similar is the case with Stop-loss, when the Trailing Stop moves up the level of stop-loss.
Sometimes if the stop-loss level is negative, the Trailing Stop moves it up making stop-loss positive and when the price suddenly begins to move against the trader, stop-loss closes the transaction.
But due to Trailing Stop the trader has profit instead of loss.
When to use the Trailing Stop?
A technique often used in attempt to protect profits without limiting potential gains by moving a stop up or down with the market.
A stop order would be raised on a long position in a bullish market, and lowered on a short position in a bear market.
For example, a trader initiates a long futures position when the market is at $4, and places a protective stop at $3.
The market then rallies to $10. He or she then moves the stop up to $9, exiting the position if the market falls to $9.
How Trailing Stop works?
Trader sets Trailing Stop 15 points below the price level, when the price begins to move against the trader, in this case, the Trailing Stop works like Stop-loss and closes the deal.
If the trader sets Trailing Stop 15 points below and stop-loss below 10 points, when the price moves in the correct direction and trading platform shifts Stop-loss level for these 15 points.
In this case stop-loss becomes positive and if the transaction will be closed by stop-loss the profit will be 5 points, or $50.
- The basic rule is that the trend movement must be at least 15 points otherwise it’s better to use stop-loss.
- Trailing Stop can be set only after the opening of the transaction and is effective with high volatility currencies.
- It’s better to use Trailing Stop when the deal became profitable.
- Trailing Stop works only when the trading terminal is used. If the terminal is turned off stop-loss or take profit works.